1.Pursuant to section 163A of the Competition and Consumer Act 2010 (Cth) andsection 21 of the Federal Court of Australia Act 1976 (Cth), the acquisition by the Applicant of all of the ordinary shares in the Second Respondent by means of a scheme of arrangement under Part 5.1 of the Corporations Act 2001 (Cth), and implemented pursuant to the terms of the Scheme Implementation Deed dated 30 August 2018, would not have the effect, and would not be likely to have the effect, of substantially lessening competition in any market in contravention of section 50 of the Competition and Consumer Act 2010 (Cth).

THE COURT ORDERS THAT:

2.The parties confer, and on or before 12:00 noon on 27 February 2020,provide an agreed minute of order as to costs, or in the absence of agreement, short written submissions as to costs,which issue will be determined on the papers.

Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

1The Applicant (‘Vodafone’, sometimes referred to as ‘VHA’) wishes to acquire all of the ordinary shares in the Second Respondent (‘TPG’) by means of a scheme of arrangement under Pt 5.1 of the Corporations Act 2001 (Cth). This would be implemented pursuant to a scheme implementation deed dated 30 August 2018 (‘Scheme Implementation Deed’).

2It is a condition precedent to completion of the Scheme Implementation Deed that TPG and Vodafone have obtained informal merger clearance from the First Respondent (‘ACCC’). On 8 May 2019, the ACCC announced that it declined to give informal merger clearance on the expressed basis that the merger would be likely to have the effect of substantially lessening competition in the supply of retail mobile services in Australia, in contravention of s 50 of the Competition and Consumer Act 2010 (Cth) (‘CCA’).

3By these proceedings, Vodafone seeks declaratory relief that the merger will not contravene s 50 of the CCA.

4The Court has come to the view that the proposed merger would not have the effect, nor be likely to have the effect, of substantially lessening competition in the supply of retail mobile services in Australia. Accordingly, the declaratory relief sought by Vodafone will be granted so the merger can proceed as contemplated by the Scheme Implementation Deed.

5The ACCC contended that the future state of competition without the merger is one where it is likely or there is a real chance that TPG will roll-out a mobile network, and will focus primarily on winning new customers through its aggressive pricing. In this way, TPG’s competitive constraint would prompt Vodafone, in particular, to respond by adjusting its prices, and the response of Vodafone would, in turn, lead to a competitive response by Optus and Telstra.

6Then, the ACCC contended that with the merger there would be no competitive effect from any new entry. The new merged entity (called ‘MergeCo’)would not offer any substantially greater competitive constraint than that which Vodafone would offer without the merger. The ACCC contended that competition would not meaningfully be improved and the benefits of a new entry would be lost.

7According to the ACCC, this comparison of the future state of competition with and without the merger, demonstrates that there is a real chance that the merger will substantially lessen competition by eliminating the prospect of TPG’s entry into the retail mobile market in Australia.

8I have not accepted the above contentions of the ACCC, and have determined that Vodafone has discharged the burden of proof placed upon it to obtain the declaratory relief it sought in these proceedings.

Overview

9Back in 2017, there was a moment in the affairs of TPG and Mr Teoh (the guiding force behind TPG) for a business opportunity to be taken to roll-out a retail mobile service. That moment has passed. To now leave TPG and Vodafone in their current state will not promote competition in the retail mobile market. A merger would not now,and would not likely in the relevant future, substantially lessen competition in the supply of retail mobile services in Australia.

10It is extremely unlikely and there is no real chance that TPG will roll-out a retail mobile network or become an effective competitive fourth mobile network operator (‘MNO’) in Australia in the relevant future.When I refer to there being no real chance I mean that there is no commercially relevant or meaningful real chance that TPG will roll-out a retail mobile network or become an effective competitive fourth MNO. Then,Vodafoneitself is facing, and will face,constraints in trying to compete with Telstra and Optus in the retail mobile market. The rational and business-like solution is for Vodafone and TPG to merge, with the result that both companies will be enhanced and will be a stronger competitive force against Telstra and Optus.

11The alternative fact scenario in the future (if, as I find,it is extremely unlikely and there is no real chance that TPG will roll-out a retail mobile network) is that any potential for a third MNO to compete with Telstra and Optus will be gone. Then, even if TPG did attempt to enter the market as it did before, Vodafone would be left as it is and TPG would have a lack-lustre presence in the retail mobile market. This would not promote competition in this market. It is not necessarily the number of competitors that are in the relevant market, but the quality of competition that must be assessed. Further, it is not for the ACCC or this Court to engineer a competitive outcome. The only question for this Court is whether the merger would have the effect, or be likely to have the effect, of substantially lessening competition in the supply of retail mobile services in Australia.

12Whether the earlier decisions of TPG to enter the Australian retail mobile market and then continue in that endeavour were sound,rational and commercial decisions is of historical interest, although of some relevance in these proceedings. Obviously, an analysis of this history will inform present market participants; rational market participants will act upon any lessons they might have gained from the previous TPG roll-out of a mobile network. To misquote Karl Marx, history repeats itself only when you ignore it. I do not imagine Mr Teoh will ignore the history. Mr Teoh will have learnt many lessons from his experience in rolling out a retail mobile network and its aftermath, including the lessons to be learnt as a consequence of these proceedings.

13However, the true focus in these proceedings, as one part of the analysis,should be on the question of whether there is a likelihood, possibility or real chance (whatever phrase is adopted) that TPG will in the future (relevantly the next five years) roll-out a retail mobile network in the circumstances that can reasonably and sensibly be predicted based upon the evidence before the Court.

14An important matter to keep in mind when considering individual factors that may impact upon the future likelihood, possibility or real chance of a roll-out by TPG is the cumulative effect of these factors, and how this cumulative effect would impact on the likelihood of making a rational commercial decision to roll-out a retail mobile network. Just because one factor is not ‘critical’ to achieving a roll-out(but is otherwise undesirable or difficult to implement) does not mean that that factor in conjunction with other factors, may not swing rational decisionmakers to a particular view against rollingout a retail mobile network. If sufficient factors that may favour a roll-out are either not likely to occur, or to a rational decision maker are undesirable or difficult to implement, this may indicate that a roll-out would be a decision no rational company in the position of TPG would take in the relevant future period. This is not to say that in looking at each factor that may be in favour of, or an impediment to, a roll-out of a retail mobile network, each factor will not need to be assessed in isolation. It is just that it will be necessary to look at the whole picture.

15Then it must be recalled that the ultimate decision to proceed in the future with a roll-out of a mobile network will be that of TPG. It is abundantly clear that if Mr Teoh does not vote in favour of a roll-out it will not occur. If Mr Teoh votes in favour of a roll-out, then further processes at Board level will need to take place to assess a business plan in light of financial, technical and market conditions (all of which have been fully ventilated and analysed in theseproceedings).

16The assessment of MrTeoh’s views and the reasons he has given for those views as to the future plans of TPG is critical to the Court’s assessment in these proceedings. It is always difficult to predict business decisions, which are subjective and depend upon the judgment of the persons making such business decisions. Then there is always the possibility that statements of business intentions made by interested parties or market participants may be made in the course of merger litigation to try and establish a more favourable counterfactual. I appreciate that both TPG and Vodafone before the Court sought to put their ‘best foot forward’ in support of the merger, and maybe what is put before a Court has a different complexion to that said outside the Court, where a company may seek to build itself up in the marketplace.

17I have had the opportunity of assessing Mr Teoh as he gave his evidence; of assessing his views and opinions; and of assessing his capabilities and business approach. No attack was made upon his credibility, and none was warranted. MrTeoh clearly had a tight grasp of the business affairs of TPG. Traditional good board governance would normally require careful documentation of analysis and decision making. Mr Teoh had a more informal and fluid approach, obviously with a capability to absorb and retain commercial information, and make sound commercial decisions. Mr Teoh did not base his decisions on rigorous financial modelling. Mr Teoh certainly portrayed as a market disruptor and as having an unconventional business style. Whilst he may do whatever it takes to progress his business, he is obviously not foolhardy. No one suggested he would act other than in a sound, rational and commercial way in deciding the future of TPG in the next five years (and beyond).

18It would of course have been open for the Court to have rejected the evidence of Mr Teoh (and other witnesses called by Vodafone and TPG) as to their predictions of the future retail mobile market. This may have meant that the evidence supporting the merger was of little probative value, although normally the fact that a witness is not believed does not prove the opposite of what is asserted. However, this is not the position I have found myself in as I have accepted Mr Teoh’s evidence and his reasons for his views. Further, this is not a case where uncorroborated oral evidence is given by just one witness as to the future of the retail mobile market.

19This leads me to another observation. The very nature of these proceedings, involving the consideration of extensive evidence and the public sworn statements made by personnel of both Vodafone and TPG as to their intentions, must be taken into account in my assessment of the future market. TPG has publicly disclosed in these proceedings its future intentions and limitations, and its senior executives have given sworn evidence that TPG has no business case for a roll-out. Both these factors create a serious disincentive for a listed public company later performing an about face and rolling out a retail mobile network. By exposing to its competitors its competitive strategy and business modelling, TPG would be under a serious competitive disadvantage if it were to roll-out a new network. This is not to say the Court process is self-fulfilling of the quest for a merger. However, where no objection is taken as to the credit of the major personnel involved in the industry (including, significantly, Mr Teoh), the Court will more readily be able to rely on industry participants’ evidence, subject to certain qualifications which I will later address.

20Further, after the trial process, Vodafone and TPG will have become better informed of the various ways forward and various obstacles to be overcome. It is to be noted that where it is accepted by all parties that the guiding minds of Vodafone and TPG are rational business people, both Vodafone and TPG at the last day of the trial still considered the merger to be in their best interests and Mr Teoh has not resiled from his evidence that no roll-out of a retail mobile network will occur in the relevant future.

21After all, an important issue I need to assess is whether Mr Teoh and the TPG Board will effectively change his and its mind. There currently stands a Board decision on 29 March 2019 that building a mobile network was not a feasible option, which has been acted upon and effectively re-affirmed in this proceeding. No party is attacking the bona fides of that decision taken in 29 March 2019. The assessment to be made is whether Mr Teoh and the TPG Board would change their mind (should the merger not proceed) keeping in mind that any change of mind will not be occurring until after the prospect of a successful merger is no longer possible.

22Much of the case presented by the ACCC was that there are technical and financial ways in which TPG could roll-out its network in the future. To some degree, the options the ACCC put forward will be available. Further, in business, challenges are there to be met and overcome. Certainly, in 2017 TPG did not have all the various options (financial and technical) set in stone at the time it decided to enter the retail mobile market. Nevertheless, it is worthwhile to keep in mind that the ACCC will not be the entity rolling out the new retail mobile network the ACCC envisages in its detailing of various future options available to TPG. The risks of such a new venture will be upon TPG and its shareholders. It will be their business decision whether to start again or roll-out in the current and future circumstances that can be predicted.

23Another very important consideration is to recall the significant difference in the position now and the position when TPG last rolled out its mobile network. One thing that TPG had previously was the will and incentive to enter the retail mobile market in Australia, led by the drive, influence and financial resources available to Mr Teoh. That will and incentive have now gone– that is not in dispute and was attested to by Mr Teoh. I cannot see that this state of affairs will alter in the next five years, even if there were options available or made available in that period of time in a financial and technical sense. The old saying comes to mind – ‘where there is a will there is a way’ – but without the will of Mr Teoh I cannot see TPG having another attempt to enter the retail mobile market in Australia.

24I cannot conclude with absolute certainty that Mr Teoh and TPG will not change their minds, and attempt to re-start entry into the retail mobile market in Australia. However, it is extremely unlikely and there is no real chance of this happening in the next five years (or beyond). Putting aside expert testimony which talks of possibilities and opportunities for MrTeoh in the future in the retail mobile market (which can only be based on certain assumptions), the general thrust of the evidence of the industry participants is that TPG’s ship has sailed in the retail mobile market in Australia. I stress I am very aware of the care that must be taken in accepting self-serving statements by interested parties and industry participants. The overall circumstances of the case will provide more reliable guidance than would oral evidence on the part of interested parties. However, the Court does not ignore that evidence, particularly when it is supported by reasons and otherwise credible. I am also aware that TPG and Vodafone in the past have been very pro-active in the promotion of their retail mobile services, and their approach now is more pessimistic. In that regard, out of court public statements of business people in connection with their enterprises come from a belief that their business is the greatest in the world, and without such a belief businesses would probably not prosper. Subject to the constraints of the law, public expressions of belief in one’s own business are to be expected and are part of marketing. In addition, care must be taken to put the past comments of market participants in context; as to timing, the market conditions, the level of generality,to what extent they were informed comments, and the circumstances in which they were made to the public.It is to be expected that opinions and views change, given new information or changes in market structure, or arising from market dynamics. This has been made evident by the emerging views of market participants in the retail mobile market over the period from 2017 to 2019.

25The other point to stress at this stage of the Court’s reasons is this. There has been no attempt to discredit any of the lay witnesses head-on: by this I mean suggesting to them in the witness box that they are not telling the truth. Undoubtedly, there are more ways of taking a city in the course of battle other than by a direct attack. The attack in these proceedings has been more subtle; by reference to the likelihood of revisiting the past, the accumulation of other evidence suggesting what could happen in the future and what would be financially and technically feasible if Mr Teoh was in fact minded to roll-out a mobile network in Australia. As the ACCC stated in its closing written submission:

One of the fundamental issues for VHA and TPG to confront was why they said that TPG would not return to its pre-merger plan of rolling out a mobile network if the merger was no longer a possibility. Identifying the cogency of the reason for the change in strategy is important because expressions of opinion by executives about what they would do absent the merger when the merger remains on foot and they want the merger to occur are of limited value. That does not require the Court to conclude that those executives do not hold the views they say they have at the time they are expressed. But the likelihood that these would remain their views if the merger was no longer a possibility must be assessed against their past behaviour and conduct.

26Whilst it is true that the views of participants in the marketplace should be assessed against ‘past behaviour and conduct’, as I have just indicated, there is limited utility in doing this unless such is viewed in the context of the time that behaviour and conduct took place.

27However, I should make one matter clear relating to the earlier roll-out of the retail mobile network by TPG. I have not come to the conclusion that the earlier roll-out of the retail mobile network by TPG was considered at the outset by Mr Teoh or TPG to be doomed and destined to commercial failure. Mr Teoh considered that the roll-out of the retail mobile network would be competitive even though the network would be of a lower quality than that of Telstra and Optus. The analysis to be undertaken now in these proceedings must consider the quality of competition in the future. However, in doing this analysis and in assessing the evidence of various witnesses, I have considered the earlier roll-out as one way to assess the reasons given by witnesses for their predictions.

28I make mention of the issue of efficiencies in the context of merger competition law. The Court is concerned with efficiencies and their effects on competitors. There is no doubt that the benefits of efficiencies, should a merger occur, should not be ignored:although the Court is not concerned just with an individual company’s efficiency, or whether the result of a merger is merely shown to improve the efficiencies between the merging companies themselves. The focus must be upon market efficiencies. Nevertheless, it should be recognised that there will be difficulties in proving and exactly quantifying benefits of efficiency with the coming into existence of a merged entity. Whilst efficiency gains must be proved to exist to the satisfaction of the Court, it needs to be recognised that requiring the merged parties to produce evidence where they are not operating as merged entities is difficult, and this difficulty needs to be recognised in assessing the evidence before the Court on the issue of efficiencies.

29There was some reference in the course of these proceedings to mathematical probability and the assessment of future circumstances. It will be a rare case where mathematical techniques will make a decisive contribution to the resolution of forensic uncertainty. As observed by Mahoney JA in Jones and Another v Sutherland Shire Council [1979] 2 NSWLR 206 at 227-228:

the court is required to test its conclusion, not merely according to the subjective conviction of it, but also by reference to the reasonableness of its basis. Whether this involves a conceptual inconsistency in relation to probability is not of significance: in fact the conclusion is so tested. It may be tested, according to the case, against facts otherwise known or assumed to exist, and the inferences from them. The court may also look to the “probability” of the conclusion being correct according to a different meaning of probability. In this sense, it may test the conclusion by reference to the “chance” of its being so, in the sense of Pascal’s dice or Beanoulli’s “Large Numbers”. It may also test it according to what, if they are available, are the statistics (the human experience reduced to numbers) as to the existence of a particular fact in given circumstances. According to such matters, it may modify a view formed on other grounds. … But the probability of the correctness of a particular proposition of fact, at least of the present kind, cannot depend completely upon such a mechanical meaning of probability. There are, as the plaintiff’s argument in the present case emphasized, many cases in which Pascalian mathematics cannot be done, because there cannot be, or at least is not, information as to what are the number of “chances” or possibilities, and whether each of these is equally weighted. In such cases, and the present is one of them, the probabilities cannot be determined in that way. The existence of the fact is, subject to testing in such ways as may be appropriate, to be determined according to the court’s assessment of the facts, and its confidence that its assessment is correct. Testing aside, it may be that further explanation of this process is a matter for the experimental psychologist rather than for the lawyer or mathematician.

30All courts in the course of their fact finding function must reach a sufficient level of persuasion depending on the nature of the fact finding they are undertaking.

31The requisite standard of proof in a civil proceeding is expressed commonly as proof ‘on the balance of probabilities’. Expression of the standard of proof in a civil proceeding as satisfaction on the balance of probabilities is an acknowledgment that the judgment to be made by the tribunal of fact is inevitably to be made under conditions of uncertainty. However, whatever its underlying probability, a disputed historical fact once found is a fact which is taken to exist for the purpose of resolving the legal rights or liabilities that are in dispute. Of course, with an analysis involving the predication of the future, further complexities arise in the course of a court’s deliberations.

32After referring to what Dixon J said in Briginshaw v Briginshaw and Another (1938) 60 CLR 336 (‘Briginshaw’), GagelerJ in an article titled‘Alternative Facts in the Court’ (2019) 93 Australian Law Journal 585 wrote:

The main thing Justice Dixon was saying, consistently with mainstream judicial and academic opinion in the United States, is that satisfaction on the balance of probabilities involves the formation under conditions of acknowledged uncertainty of a subjective belief. The requisite belief is an “actual persuasion” that the fact in issue actually exists – that a past event the occurrence of which is uncertain and is disputed did indeed occur. What he was emphasising is that belief, as Bentham put it, “is susceptible of different degrees of strength, or intensity”. The belief involved in having a state of satisfaction “beyond reasonable doubt”, the universally accepted expression of the requisite standard of proof for a fact asserted by the prosecution in a criminal proceeding, is similar to the belief involved in having a state of satisfaction “on the balance of probabilities” in that it is subjective belief and different only in that it is belief that must be held with a greater degree of intensity.

33In these proceedings the Court has reached a sufficient level of persuasion on the relevant factual issues to reach the ultimate conclusion that the merger would not have the effect, and would not likely have the effect, of substantially lessening competition in the retail mobile market. The Court has been left in no relevant uncertainty, after reviewing the evidence, as to the future of the retail mobile market which will not involve Mr Teoh or TPG entering the Australian retail mobile market in the next five years.

34Whilst there are a number of reasons leading to the conclusion I have reached, it was accepted by the parties that if I took the view I now have on there being no future likelihood, possibility or real chance of TPG entering into the retail mobile market, Vodafone would be entitled to the declaration sought in these proceedings.

RELEVANT LEGAL PRINCIPLES

Introduction

35As already indicated, Vodafone seeks a declaration that the merger would not have the effect, and would not be likely to have the effect, of substantially lessening competition in any market in contravention of sub-s 50(1) of the CCA. That sub-section relevantly provides that:

A corporation must not directly or indirectly:

(a)acquire shares in the capital of a body corporate; …

if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market.

36Subsection 50(3) of the CCA provides a list of non-exhaustive factors that must be taken into account when assessing whether an acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market. These factors relevantly include ‘the height of barriers to entry to the market’ (sub-para (b)); ‘the level of concentration in the market’ (sub-para (c)); ‘the dynamic characteristics of the market, including growth, innovation and product differentiation’ (sub-para (g)); and ‘the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor’ (sub-para (h)).

37Because Vodafone seeks a declaration in the terms referred to above, it is necessary for it to establish, on the balance of probabilities, that the merger ‘would not be likely to have the effect of substantially lessening competition in the relevant market …’. In analogous circumstances in Australian Gas Light Company v Australian Competition and Consumer Commission and Others (2003) 137 FCR 317 (‘AGL’), French J held at 420 [355] that Australian Gas Light Company, the applicant in that case, was required to:

negative the existence of any real chance … of a commercially relevant ormeaningful lessening of competition flowing from the acquisition.

38Justice French emphasised at 420 [356] that if the Court was ‘left in a position of uncertainty’ about theexistence of this ‘real chance’, then Australian Gas Light Company was not entitled to the relief that it sought.

39It is convenient to set out the legal principles governing theinterpretation of several terms which appear in sub-s 50(1) of the CCA, and which arerelevant to the resolution of this proceeding.

‘Market’

40Subsection 50(1) of the CCA focuses upon the effect of an acquisition ‘in any market’. Theconcept of a ‘market’ is given content by s 4E and sub-s 50(6) of the CCA. Section 4E of theCCA defines ‘market’ as meaning, unless the contrary intention appears:

a market in Australia and, when used in relation to any goods or services,includes a market for those goods or services and other goods or services thatare substitutable for, or otherwise competitive with, the first-mentioned goodsor services.

Subsection 50(6) of the CCA provides that, for the purposes of sub-s 50(1), ‘market’ means amarket for goods or services in Australia, a State, a Territory or a region of Australia.

42The parties agree that for the purpose of these proceedings, there are only three pertinent markets, and only one in which there is controversy about competitive effects.

43The first and most pertinent market is the national market in Australia for the supply of retail mobile services to retail customers. The character of this market has been the subject of a considerable amount of evidence. It is common ground that competition occurs across a number of factors, including price, data inclusions, geographic coverage, service quality, service add-on and retail support. Customers can readily switch from one provider to another.

44There is no dispute between the parties as to the product and geographic dimensions of the retail mobile market. The product dimension of the centrally relevant market is properly defined as retail mobile services, and the market is Australia-wide. The parties essentially agree that the temporal dimension of the market does not extend beyond five years.

45The second is the national wholesale market in Australia for the supply of wholesale mobile services to mobile virtual network operators (‘MVNO’) for the purpose of resupply to retail customers. The only suppliers in this market are Telstra, Optus and Vodafone. The customers are the 60 or so MVNOs operating in Australia.

46The third is the national retail market in Australia for the supply of retail fixed broadband services to individual/household, small business, government and enterprise customers. As at June 2018, the major competitors and approximate market shares were as follows: Telstra 41%, TPG 25%, Optus 15% and Vocus 7%. Vodafone’s share has always been less than 1%.

47The ACCC accepted in these proceedings that the merger would not have the effect, and would not be likely to have the effect, of substantially lessening competition in the wholesale mobile market or the retail fixed broadband market in contravention of s 50 of the CCA. However, the ACCC denied that the merger would not have the effect, and would not be likely to have the effect, of substantially lessening competition in the retail mobile market.

‘Substantially lessening competition’

48The concept of ‘competition’ is not defined for thepurposes of sub-s 50(1) of the CCA.However, in accordance with the reasons of the TradePractices Tribunal in Re QCMA, competition is usually understood as ‘a dynamicprocess [which is] generated by market pressure from alternative sources of supply andthe desire to keep ahead’.In short, ‘[c]ompetition expresses itself as rivalrousbehaviour’.

49As to the meaning of ‘substantial’ in the context of sub-s 50(1) of the CCA, Beach J held inAustralian Competition and Consumer Commission vPacific National Pty Limited (No 2)[2019] FCA 669 at [1262] (‘Pacific National’), synthesising a number of previous authorities, that:

[T]he concept of substantially lessening competition does not require a large orweighty lessening of competition, but only one that is meaningful and relevantto the competitive process. A short term effect readily corrected by marketprocesses is not substantial in this respect. But a medium to long term effectnot easily corrected may amount to a substantial lessening of competition.

50When assessing the competitive detriment which is likely to result from the merger, it isgenerally considered useful to compare the future state of competition with the merger(often described as the ‘factual’) against the future state of competition without themerger (often described as the ‘counterfactual’): see, eg, AGL at 324 [9], 417-418 [352]-[353] (French J), and the authorities cited therein.

51The Court’s task is not to assess whether, if TPG entered the retail mobile market as a fourth MNO, there would be some immediate price reaction from incumbent MNOs. The competitive impact created by new entry is often immediately obvious, but fleeting in its effect. An immediate but transitory increase in competition is not ‘substantial’ in the relevant sense – it is not meaningful to the competitive process. Therefore, a proposed merger that only forecloses the prospect of some short-term competition will not ‘substantially’ lessen competition. If, for instance, TPG would have been an unsuccessful and uncompetitive MNO in the medium to long term, the removal of the prospect of TPG entering as a fourth MNO could not ‘substantially’ lessen competition for purposes of s 50.

The meaning of “likely” reflecting a “real chance or possibility” does notencompass a mere possibility. The word can offer no quantitative guidance butrequires a qualitative judgment about the effects of an acquisition or proposedacquisition. The judgment it requires must not set the bar so high as effectivelyto expose acquiring corporations to a finding of contravention simply on thebasis of possibilities, however plausible they may seem, generated byeconomic theory alone. On the other hand it must not set the bar so low aseffectively to allow all acquisitions to proceed save those with the most obvious,direct and dramatic effects upon competition. By the language it adopts and thefunction thereby cast upon the Court and the regulator in their consideration ofacquisitions s 50 gives effect to a kind of competition risk management policy.The application of that policy, reflected in judgments about the application ofthe section, must operate in the real world. The assessment of the risk or realchance of a substantial lessening of competition cannot rest upon speculationor theory. To borrow the words of the Tribunal in the Howard Smith case, theCourt is concerned with “commercial likelihoods relevant to the proposedmerger”. The word “likely” has to be applied at a level which is commerciallyrelevant or meaningful as must be the assessment of the substantial lesseningof competition under consideration...

54All parties encouraged me in these proceedings to follow the approach of French and BeachJJ.

55This Court is not formally so bound to follow these earlier statements of principle.Nevertheless, while this Court may not formally be bound tointerpret the term ‘likely’ as requiring the demonstration of a ‘real chance’, theweight of authority supports such an interpretation.

56However, as recognised by Beach J in Pacific Nationalat [1269], despite French J’s reasons in AGL inrespect of the proper construction of s 50 and the endorsement of the ‘real chance’construction in the subsequent case law, several later decisions have introduced adegree of uncertainty as to the application of that test.

57The uncertainties that have arisen in the application of the test are illustrated by thereasons of Emmett J at first instance, and the separate reasons of Buchanan andYates JJ sitting as part of the Full Court in Metcash. At first instance, Emmett Jpropounded a two-stage test with different legal thresholds for the counterfactual and thesubstantial lessening of competition assessments:

(1)first (at [145]), the ACCC, as the applicant in that case, was required to:

establish, on thebalance of probabilities, what the future state of the market will be, both with andwithout the proposed acquisition.

(2)Secondly (at [146]), the ACCC, as the applicant in that case, was required to prove that:

thereis a real chance that, if the proposed acquisition does proceed, that would result ina substantial lessening of competition compared to [the counterfactual].

58On appeal, Yates J held in Metcash at 342 [230] that it was not necessary for the Full Court to reach a concluded view as to whichtest ought be applied, because Emmett J had found that even:

if the Commission was onlyrequired to establish a real chance that its counterfactual case would come to pass inthe event that the … acquisition did not proceed to completion, the Commission had notsatisfied that standard.

Nonetheless, both Buchanan J (at 307-319 [37]-[90]) and Yates J(at 341-342 [215]-[230]), in obiter,considered the construction of the meaning of ‘likely’, and the appropriateness ofseparately analysing the counterfactual.

59Departing from French J’s construction of ‘likely’ in AGL, Buchanan J(at 305 [25]), held that the realchance test should not be applied to s 50,and expressed concern that the test reflected‘a departure from the ordinary civil standard of proof on the balance of probabilities’ (at 308 [401]). JusticeBuchanan also held that if the counterfactual were to be separately proved, both thecounterfactual and the substantial lessening of competition limbs ‘require the samestandard of proof (balance of probabilities)’ (at 308 [40]). Justice Buchanan considered, however, that‘they should probably be regarded as constituent elements of a compound conception’ (at 308 [40]).

60While emphasising that it was not necessary to reach a final view on the matter,YatesJ(at 342 [230]) preferred the view that a single-limbed test should be applied, ‘involving one evaluativejudgment’, with the ‘real chance’ standard applying ‘to determine the existence andinterrelationship of all of those facts, matters and circumstances’ which defined the futurestate of affairs (at 341 [227], [228]).His Honour explained (at 341-342 [227]-[229]):

If one accepts that the starting point is to draw a distinction betweencircumstances where an acquisition would have the effect of substantiallylessening competition, established on the balance of probabilities, andcircumstances where an acquisition would be likely to have that effect,established on the basis that there is a real chance that that would be so, it canbe seen that s 50(1) itself imposes its own differential standards of proof, atleast so far as the determination of competitive effect is concerned. The utilityof imposing differential standards, as a matter of legislative policy, is not at allclear, given that contravention will always be established on the lowestthreshold being satisfied. Nevertheless, if one is to proceed on that basis in thepresent case, then one question involving one evaluative judgment emerges:would the acquisition be likely to substantially lessen competition in the relevantmarket?

The answer to that question points to, and depends on, the interrelationship ofall the facts, matters and circumstances which, in combination, define the futurestate of affairs that is characterised as being “likely”. If, for the purpose ofsatisfying the requisite legal standard, “likely” is taken to have the meaning of“a real chance”, then it is difficult to see why that standard should not apply todetermine the existence and interrelationship of all those facts, matters andcircumstances. If not, the possibility exists that different legal standards willintrude into inseparable elements of the calculus employed to detect change tothe state of competition. As I have noted, a counterfactual is no more than anelement of that calculus. Conceptually, it has no separate existence or purposein the present context, other than as an aid to detect the existence and extentof change in the process of competition.

Moreover, in the continuum of fact-finding, there may not be a bright linebetween those facts that determine the future state of a market and those factsthat determine the future state of competition in that market. Indeed, one canenvision examples where the facts that show the likely future state of the marketwill be the very facts that are determinative of a finding about the likely futurestate of competition in that market. In those cases, can fact-finding be regulatedby two different standards of proof? To require, in those cases, the adoption, ifthat be conceptually possible, of a higher standard for one purpose (todetermine the state of the market) would be to obliterate the threshold to whichthe second limb of s 50(1) has subjected the impugned conduct.

61As noted above, in Pacific National, Beach J followed the approach of French J in AGLand Yates J in Metcash in respect of the meaning of ‘likely’, holding that ‘in terms of thestandard of proof overall, “likely” has been held to mean a real chance’, and that theACCC, as the applicant in that case, did not ‘necessarily need to prove its counterfactualon the balance of probabilities’ (at [1266] and [1279]).

62Furthermore, Beach J rejected the proposition that it was appropriate to assess thecounterfactual as a discrete enquiry (at [1276]-[1279]).Rather, endorsing the approach taken by Yates Jin Metcash(at [1276]-1279]),Beach J found that ‘the subject of the likelihood or real chance is singularin the sense that s 50 refers to the likely effect of substantially lessening competition andthus ultimately poses one question involving one evaluative judgment’ (at [1276]).Accordingly, inhis Honour’s view, the application of s 50 in the case before him (at [1276]):

turn[ed] on [his] satisfaction in relation to this single evaluative judgment, eventhough the exercise of determining whether the competitive effects of atransaction amount to a substantial lessening of competition involves multipleconstituent inquiries, namely, identifying the futures with and without thetransaction, identifying the effect on competition of each, and then making therelevant comparison leading to answering the one question [above].

Understood in this way, and endorsing the concerns raised by Yates J in Metcash,BeachJ considered it ‘a distraction to ask what standards of proof apply at each of theatomised constituent steps involved in assessing competitive effects’ (at [1277]).

63Each of theparties to these proceedings accepted that the single evaluative judgment approach is to be adopted.

64When addressing how, as a matter of practical reality, this single evaluative judgmentwas to be made, Beach J said at [1279] that:

the ACCC does not necessarily need to prove its counterfactual on the balanceof probabilities. But the magnitude of any real chance that it demonstrates inrespect of the alleged future states will practically and ultimately affect themagnitude of the real chance that it is able to demonstrate in respect of thealleged effects on competition and whether that rises to the requisite level of alikely effect of substantially lessening competition. …

65Consistently with the analysis of French J in AGL, thereasoning of Yates J sitting as part of the Full Court in Metcash, and Beach J in PacificNational, it is appropriate for the Court in these proceedings to make a ‘single evaluative judgment’. In these proceedings, that ‘single evaluative judgment’ requires Vodafone to satisfy theCourt that there is no ‘real chance’ that the merger would likely have the effect of substantially lessening competition (Pacific National at [1277] (Beach J); Metcash at 341-342 [227]-[229](Yates J)). This is the approach I intend to take.

66However, I note the submissions of Vodafone, which wished to reserve its position on this issue should the matter go on appeal.

67Vodafone referred to the analysis of Buchanan J sitting in the Full Court in Metcash. As Buchanan J there explained, the ‘real chance’ standard appeared to slip into the jurisprudence in a series of cases where the construction of ‘likely’ was in no way dispositive. That same observation can equally be made of Beach J’s recent judgment in Pacific National. Vodafone submitted that the authorities in this Court are not a basis for adopting the ‘real chance’ construction, particularly given that that construction is at odds with the ordinary meaning of the word ‘likely’. Vodafone contended that the language of ‘real chance’ is a gloss on the language of the text of the statute, and a surer guide to the proper application of s 50 is to use the language of the statute.

68I see some force in this approach. One must distinguish between the requirements of the substantive law (s 50) and the principles or rules of evidence. The content of s 50 is not addressing the evidentiary burden. It is addressing the present (‘would have the effect’) and the future (‘be likely to have the effect’) in the context of competition in the relevant market. The burden of proof is set out in s 140 of the Evidence Act 1995(Cth), keeping in mind the principles referred to by Dixon J in Briginshaw and my discussion above. This does not take away from the evaluative or quantitative judgment a Court still needs to make, which will involve the concepts referred to by FrenchJ in AGL:‘commercially relevant or meaningful’(at 420 [355]), not ‘a mere possibility’ (at 416-417 [348]), and operating ‘in the real world’ (at 416-417 [348]). These concepts are relevant to the substantive requirement of s 50 to give effect to competition law and policy in the context of merger management. I intend to apply these concepts in these proceedings.

69However, whatever test is adopted ultimately makes no difference to the outcome in these proceedingsbecause of the conclusions I have reached on the issues presented to the Court.

What amounts to a ‘substantial lessening of competition’?

70The concept of a ‘substantial’ lessening of competition refers to one that is ‘meaningful or relevant’ to the competitive process. As I have already alluded to, the concept of substantiality also has a temporal aspect. In Pacific National, BeachJ observed at [1262]:

the concept of substantially lessening competition does not require a large or weighty lessening of competition, but only one that is meaningful and relevant to the competitive process. A short term effect readily corrected by market processes is not substantial in this respect. But a medium to long term effect not easily corrected may amount to a substantial lessening of competition.

71I make an observation on the application in these proceedings to the evaluation process. The issue of whether TPG would enter as an MNO is one element of the counterfactual, although, as this issue has been presented to the Court, a significant element. However, it should not be taken for granted that a world with TPG as a fourth MNO is substantially more competitive than a world with Vodafone and TPG merged. In fact Vodafone contended that this will not be the case, and that a world with TPG as a fourth MNO will not be substantially more competitive (and indeed will be less competitive) than a world with the merger. This is a matter legally relevant to this Court’s enquiry in these proceedings.

72Another matter to note is that s 50 does not requireVodafone to prove that MergeCo would impose an additional competitive constraint on Telstra and Optus beyond that which would be imposed in any event by Vodafone. Section 50 does not impose a positive duty on parties seeking to implement proper commercial arrangements to demonstrate that their mergers will increase competition. A party is entitled to a declaration of non-contravention of s 50 provided that the merger in question would not, and would not likely, substantially lessen competition.

CHRONOLOGY OF EVENTS

73The parties provided to the Court chronologies which I have adopted and incorporated into one document which is attached to these reasons as Attachment ‘A’ and marked ‘Court Chronology’. It does not represent an agreed position between the parties, but is based upon documented evidence or unchallenged evidence, which I accept and forms a factual basis of my conclusions.

WITNESSES

74The lay witnesses were as follows:

75Evidence type

Witness name

Witness description

Evidence relied upon by

Witness cross-examined (Y/N)

Lay

Badrinath, Vivek

Chief Executive Officer – Rest of World Region, Vodafone Group Plc

VHA

Y

Baker, Vaughan

Group Director, Government and Corporate Relations, MyRepublic Group Limited

76The determination of these proceedings does not substantially turn on questions of credit in relation to any of the witnesses, including the lay witnesses. In relation to criticisms concerning individual expert witnesses I will consider these in other parts of my reasons.

77However, I make these general observations on two expert witnesses.

78Mr Smith was an expert economist called by the ACCC. Clearly Mr Smith is highly skilled and very thorough in his written and oral evidence, specialising as he does in the economics of competition and regulation. He applies economics, econometrics and industrial expertise to competition policy, litigation and arbitration. Mr Smith has acted as an expert witness in investigations of mergers, whether horizontal or vertical, and abuse of market power inquiries, covering excessive pricing, price discrimination, margin squeezing and predation, as well as in the assessment of pricing, profitability valuation and damages estimation in the context of dispute resolution and international arbitration. However, Mr Smith is not familiar with the telecommunications industry, which he readily accepted. MrSmith necessarily had to rely upon a number of assumptions in reaching his conclusions, but himself recognised that the conclusions he reached would depend upon many factual matters to be determined by the Court in these proceedings.

79A very important expert witness for the purposes of these proceedings, recognised as such by all parties, was Mr Wright. Mr Wright was an expert called by the ACCC to give evidence on retail mobile networks. MrWright had 37 years of experience in the telecommunications industry, and was well versed in the details of rolling out and operating a mobile network in Australia.

80Mr Wright was a disinterested and objective witness –as lead Counsel for the ACCC put it, he had ‘no dog in this fight’. I have in the main accepted Mr Wright’s evidence: it provides significant objective evidence in a consideration of Mr Teoh’s position and in predicting the future of the retail mobile market.

SUMMARY OF THE RETAIL MOBILE MARKET

81I now set out a summary of the retail mobile market. This has been taken from the primer prepared by the parties,the pleadings and substantially from Vodafone’s closing written submissions. I regard this summary as non-controversial. Where reference is made to the position of Vodafone, such as in relation to its current plan to roll-out 5G, the cost of a roaming agreement, market conditions and types of product (such as pre-paid and post-paid plans), I have relied upon the uncontested evidence presented by Vodafone or TPG.

82The primer prepared by the parties is attached to these reasons as Attachment ‘B’, which also has incorporated the definitions of various terms or abbreviations used in these reasons where otherwise not indicated herein.

Characteristics of mobile networks in Australia

83As a very general statement, the retail mobile market is a market characterised by relatively robust price competition which has only intensified since 2014.

84Retail mobile services in Australia are supplied by MNOs and MVNOs. There are three MNO competitors in Australia, being Telstra, Optus and Vodafone. There are approximately 60MVNO competitors in Australia. MVNOs acquire mobile services on a wholesale basis from MNOs.

(2)a ‘backhaul’ transmission network, which connects the RAN sites to the core network; and

(3)a core network, which connects and manages the different parts of the network and connects to other networks (including the internet).

86An MNO requires considerable funding to establish and maintain a mobile network. Operating a mobile network is a capital-intensive business driven by the need for constant investment. This is because competitive pressures demand constant improvements in capacity and quality:

(1)mobile technology is constantly evolving, with each new generation enabling new services and better quality. At present, the introduction of 5G is driving the requirement for MNOs to invest in upgrading their networks, with Telstra and Optus already offering 5G services;

(2)it is necessary to increase regularly the capacity of the network to ensure that a quality service can be delivered to consumers. This can only be done by acquiring additional spectrum if available, building new sites and/or upgrading equipment. At present, there is an urgent need to increase capacity because consumer data usage is increasing each year. Telstra and Optus have reported that data traffic on their networks is growing at 50% year-on-year. XXX XXXXXXX XXXXXX XXXX XX XXXX XXXXXX XX XXX XXXXXXXX XXXXXXX XX XXXXXXX XXX XXX XXXX;

(3)it is necessary to replace aged or superseded equipment; and

(4)it is necessary to maintain and upgrade networks between generational changes.

87Given the high fixed cost involved in establishing and maintaining a mobile network, scale is very important for an MNO to compete effectively. By contrast, entry is relatively easy for MVNOs, which rely on wholesale access to an MNO’s network to supply services to customers.

Significance of network coverage and capacity

88Two key aspects of the quality of a mobile network are:

(1)‘coverage’– the geographic locations that a customer’s mobile device is able to connect to a base station site in the mobile network; and

(2)‘capacity’– the amount of combined data bandwidth (usually measured in multiples of bps) a network has to support the volume of voice and data traffic generated by multiple simultaneous users on a network at defined performance standards.

89Coverage can be measured either by geographic area or the proportion of the Australian population that the MNO can reach. Indoor coverage is also an important aspect of the quality of a network. While coverage is typically advertised on an outdoor basis, each MNO has sought to achieve good indoor coverage as consumers require coverage indoors, at work and at home. Achieving indoor coverage requires significantly higher RAN investment than that required to achieve outdoor coverage.

90To offer the mobility that customers expect from mobile services, coverage needs to be provided in the areas where customers ‘work, live and play’, and the areas in-between. If an MNO does not have coverage in an area, its customers will be unable to use their mobile devices in that area.Coverage is important to consumers, corporates and enterprise customers – in other words, ‘coveragematters’ and is a significant aspect of competition between MNOs. It is for thisreason that MNOs and MVNOs advertise and promote their network coverage.

91The capacity of a mobile network is affected by:

(1)the nature and amount ofspectrum to which the MNO has rights;

(2)the location, number and type of macroRAN sites and small cell sites;

(3)the capability and type of equipment used in thenetwork, including spectral efficiency of the technology used; and

(4)the capacityof the transmission network.

Telstra currently holds more spectrum than Optus inregional and rural areas and more than Vodafone and TPG in all areas (iemetropolitan, regional and rural) while Optus holds more spectrum than Telstra,Vodafone or TPG in several major metro areas.

92Network coverage and capacity contribute to customers’ perceptions of networkquality, which refers to factors such as voice quality, ability to establish a call,ability to maintain a call, data speed and latency (ie time taken for data to travel to andfrom the customer). Lower network quality may, for example, manifest in slowdownload speed (which results in ‘buffering’, ie delays in service), an inability touse certain mobile applications or poor voice quality or drop outs.The maximumvideo resolution that can be streamed depends on the capacity that is made availableby the network.

93Poor network quality is a driver of customers switching from one MNO toanother (referred to as ‘churn’). Total network capacity affects the number ofcustomers an MNO network can sustain.

94Inferior network quality was the cause of what has come to be known as‘Vodafail’ (which I will discuss in detail later).From December 2010, Vodafone experienced serious network issues,which caused high rates of dropped calls and poor internet connectivity. Vodafone lostconsiderable market share which it has never recovered despite making significantnetwork investment.

95Given the importance of network quality to customers, Vodafone, Telstra and XXX XXXX XXXX XXXXX XXXX XXXXX XXXX XXXX XXXX XXXX.Vodafoneuses Ookladata, and other measures, to report its network speedsinternally. That data shows that Vodafone’s average download speeds have declinedand are now considerably lower than Telstra and Optus’ average speeds.

97Vodafone is the third largest supplier of mobile telecommunications services inAustralia.Its business comprises the supply of retail mobile services, wholesalemobile services to MVNOs, and since December 2017, the supply of retail fixedline broadband services on the NBN in metropolitan areas.Vodafone supplies retailmobile services under the ‘Vodafone’, ‘Lebara’ and ‘Kogan Mobile’ brands. Vodafone’smobile customer base comprises approximately six million customers.Vodafone usesthe Lebara and Kogan brands as its second brands with a view to targeting valueor price sensitive consumers at the low end of the market (XXXXXXXXX XXXXX XXXXXX XXXXX XXX).

99Vodafone supplies mobile services to enterprise customers. Vodafone’s revenue from thesale of mobile services to enterprise customers in the 2018 financial year was around XXX XXXXXXX.This figure includes sales of mobile services to the smalloffice/home office segment (‘SOHO’) as well as small businesses.

100Other than retail fixed broadband services through the NBN to consumers andSOHO, Vodafone does not offer any fixed telecommunications services to businesses. Vodafone is not a relevant competitor in that segmentas it does not provide servicessuch as static IP, fibre transmission, fixed voice, cloud and colocation services thatare provided by entities such as TPG and Macquarie Telecom.

101The geographic coverage of Vodafone’s network is approximately 600,000 squarekilometres and reaches around 96% of the population.Vodafone acquires roamingservices from Optus under an agreement which came into effect in 2012.Underthat agreement, Optus supplies roaming services to Vodafone, which extends Vodafone’snetwork coverage from 600,000square kilometres (reaching 96% of the Australianpopulation) to 900,000 square kilometres (reaching 97% of the Australian population).

(2)a supplier (as an MVNO) of retail mobile services to consumers; and

(3)a provider, through its subsidiaries AAPT and PIPE Networks Pty Ltd, ofwholesale transmission services to other telecommunications service providers.

104TPG has historically expanded through acquisitions. TPG acquired AAPT in 2014,which owned inter-capital fibre optic infrastructure, and diversified TPG’srevenue. In around September 2015, TPG acquired iiNet which gave it a largerretail customer base in retail fixed broadband services.

105TPG’s key retail brands are TPG, iiNet and Internode.TPG has approximately1.9 million fixed broadband subscribers. TPG owns and operates its own voice,data and internet network infrastructure.

106TPG operates as an MVNO and has approximately 415,000 mobile subscribers in total. TPG has agreements with Vodafone and Optus to acquire wholesale mobile services.

107In April 2017, TPG decided to acquire 700 megahertz (‘MHz’) spectrum and announced itsintention to roll-out a mobile network.

Telstra

108Telstra supplies retail mobile services and retail fixed broadband services and hasthe largest number of subscribers for those services.It is the largest MNO by aconsiderable margin, with over 15 million subscribers.This market share doesnot include Telstra’s market share in the enterprise and government sectors, nor itssecond brands and MVNOs.

(2)its second brand, ‘Belong’. Belong is a division of Telstra CorporationLimited. Belong commenced supplying retail mobile services in aroundOctober 2017 and by 30June 2019, had around 248,000 subscribers.Telstra launched Belong to seek to improve Telstra’s ability to capture sharein the price sensitive segment;

(3)the ‘Boost Mobile’ brand. Boost Mobile acts as a reseller for Telstra.Telstra’s focus for Boost has traditionally been the youth (16 to 34 years old)segment, and target customers such as school leavers, university studentsand young people starting their first job.

110Telstra has 3G and 4G networks and is in the process of rolling out a 5G network.Telstra is advertising its 5G proposition heavily.Telstra has also alreadyintroduced Samsung and LG phones that are 5G compatibleand engaged insignificant marketing to promote its 5G roll-out. Telstra’s marketing is aimed ateducating customers about 5G and its benefits.

111The geographic network coverage of Telstra’s 3G and 4G networks greatly exceedsthat of its competitors.Given that Telstra owns almost all of the networkinfrastructure in regional and rural Australia, other MNOs are required to payTelstra, typically at a premium price, to access its infrastructure in order to provideservices in these areas.For example, Vodafone must pay Telstra for use of itstransmission infrastructure in certain regional areas where Telstra is the onlysupplier.Some transmission services are regulated but many services andelements of the charges are not.

112Technology leadership is an important part of Telstra’s competitive strategy and itinvests heavily in its mobile and fixed networks to achieve it.

113Telstra is able to offer bundled products and services due to its position in themobile and fixed services markets. Telstra also has a dominant position in thesupply of both fixed and mobile telecommunication services to corporate andgovernment sectors.In the 2018 financial year Telstra reported that its mobile services revenue forits small business and enterprise segments was $2.775billion.

114Telstra supplies mobile services by wholesale to MVNOs and, following Optus,has the second largest number of customers of wholesale mobile services.Currently, the MVNOs on Telstra’s network include: ALDI Mobile, Lycamobile,Pennytel, Southern Phone, Tangerine Telecom, TeleChoice, Think Mobile andWoolworths Mobile.As at December 2017, Telstra had 862,000 MVNOsubscribers.By December 2018, that figure had grown to 1,098,000subscribers.

115Telstra owned and operated the legacy copper network, prior to its recent transferin part to NBN Co. Telstra owns and operates an extensive transmission networkand supplies wholesale transmission services to other service providers. Telstraacquires wholesale services from NBN Co, supplies NBN wholesale aggregationservices to smaller retail service providers and has had the largest number ofwholesale services in operation on the NBN.

116Telstra is in a very strong financial position, with significant funds available forcapital expenditure.Its financial position is in part due to its arrangements withgovernment including NBN Co, under which Telstra received substantialpayments from NBN Co for the transfer of its copper and hybrid fibre coaxialassets, duct rentals and in respect of each customer disconnected from Telstra’saccess network.

Optus

117Optus supplies mobile services in Australia and is the second largest MNO inAustralia with a retail market share of approximately 28%. As at 31 March 2019,Optus had over 10 million wholesale and retail mobile subscribers.Optus has a3G and 4G network and is also in the process of rolling out a 5G network.Optussupplies retail mobile services under the ‘Optus’ brand.It used the ‘VirginMobile’ brand until May 2018, but has been phasing it out since then.InFebruary 2018, Optus entered into an agreement with Catch Group, which has asimilar business to Kogan, to sell Optus mobile services under the brand ‘CatchConnect’.

119Like Telstra and Vodafone, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX.Optus’ strategy has also been toposition its Optus branded business as comparable to Telstra’s ‘premiumnetwork’.To that end, Optus has invested considerable amounts of money toimprove and market network performance.It has also sought to differentiate itsoffering by investing in acquiring content for broadcast to its subscribers.

120Optus has the third largest number of customers for retail fixed broadbandservices, following Telstra and TPG.To supply these services, Optus acquireswholesale services from each of NBN Co and Telstra. Optus also supplies NBNwholesale aggregation services to smaller retail service providers and has had thethird largest number of wholesale services in operation on the NBN.

121Optus also supplies mobile and fixed telecommunication services to corporate andgovernment customers. It is one of the key competitors in this space, although itis a long way behind Telstra.XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XX.Optus also owns and operates its own transmission networkand supplies wholesale transmission services to other service providers.

122Optus is in a strong financial position and has significant funds available for capital expenditure.

Coverage and capacity of the three MNOs

123The three mobile networks in Australia have different geographic footprints butare similar in terms of population coverage. Telstra’s network has the largestcoverage footprint, at over 2.4million square kilometres.Optus is the secondlargest, at around one million square kilometres.Vodafone’s network has thesmallest geographic coverage at around 600,000square kilometres, whichincreases to 900,000 square kilometres under Vodafone’s roaming agreement with Optus.

124The differences appear smaller when expressed as population coverage due topopulation distribution. Telstra’s 3G network covers around 99.3% of thepopulation,Optus’ 3G network covers around 98.5% of the populationandVodafone’s 3G network covers around 95.7% of the population, although this canextend to 97% under its Optus roaming agreement (which I referred to earlier).Geographic coverageremains important in areas of low population density – eg along highways andother transport routes in rural areas.

MVNOs

125As noted above, there are approximately 60 MVNOs operating in Australia. There are low barriers to entry into the market for MVNOs.

126While MVNOs set their retail prices independently, they are necessarily limited bythe economics of their wholesale arrangements with the relevant MNO.Giventhis, MVNOs compete with each other and with the MNOs on price and customersupport.There has been an increase of 30% in the market share of MVNOs since June 2016.

128Based on figures taken from the ACCC Telecommunications Reports 2013-2014and the ACCC Communications Market Report 2017-2018,the table below sets outmarket shares for the period 2010 to 2018. The market shares for the MVNOs inthis table may include the second brands of the MNOs:

Types of mobile services offered (pre-paid and post-paid)

129There are two main types of mobile products sold in Australia: pre-paid mobileproducts and post-paid mobile products.With a pre-paid mobile product,customers pay in advance for a particular voice and data allowance to be usedwithin a particular period. Following that period, the subscriber must ‘recharge’.With a post-paid mobile product, customers are billed on a regular basis after aperiod (typically monthly) of usage pursuant to a customer’s contract (usually 12,24 or 36 months).The customer does not lose access to mobile services if theyexceed their plan allowances. However, they may be charged for any additional usageon their next bill.

130Vodafone supplies both pre-paid and post-paid products under its primary ‘Vodafone’brand, as do Telstra and Optus under their primary brands.Vodafone also suppliespre-paid products under the Kogan and Lebara brands.Vodafone’s post-paidproducts account for around XX%of Vodafone’s total retail mobile revenue. Post-paid plans may be offered as SIM only (‘SIMO’) plans or as handset plans. Under SIMO plans, customers purchase a mobile service but not a mobile handsetfor use in connection with that service. Under handset plans, customerspurchase both a mobile service and a handset and pay for the cost of the handsetover a specified period (12 to 36months).While pre-paid mobile services may bebundled together with a handset, in many cases pre-paid mobile services are supplied without a handset.

131Each of the MNOs and MVNOs offer a range of pre-paid and post-paid plans, all atdifferent price points or headline prices.Post-paid plans offered by the MNOsunder their primary brand are generally priced at over $30.For example, Vodafonedoes not offer pre-paid or post-paid products on its Vodafone brand for less than $30 per month.

132This distinction between pre-paid and post-paid is beginning to break down. Forexample, some pre-paid products are now being offered on an automatic renewalor ‘auto top up’ basis.Notwithstanding this, the distinction between pre-paid andpost-paid remains important.

133The competitive dynamics in each segment are different.MVNOs by and large target the pre-paid segment, and to a much lesser extent, thepost-paid segment. Within Vodafone, there are separate business units forpre-paid and post-paid products, each with its own pricing team.

134Each of Vodafone, Telstra and Optus equates pre-paid with the price sensitive segmentof the market (that is, customers who value price over quality in the trade-off) andpost-paid with the high end segment of the market (that is, customers who valuequality over price).XXXXXXXVodafone, TelstraXXXXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX.

135TPG was proposing to launch a pre-paidproductand was unlikely to have a handset offering. The competition was to be focused,at least initially, on the segment of the market TPG was proposing to target.

136The table below sets out the number of pre-paid and post-paid subscribers on eachof Vodafone, Telstraand Optus.These figures include both retail and wholesale subscriber numbers:

Price competition

Introduction

137MNOs compete on both price and quality.

138Price competition in the retail mobile market takes place in a variety of ways:

(1)for both pre-paid and post-paid products, it may involve introducing a newplan at a lower headline price or price point;

(2)for post-paid plans, it may involve offering subscribers a discount (such as10%) off the headline price for that plan.It may also involve discountingthe monthly handset price for particular devices in order to drive sales;

(3)in the case of a pre-paid plan, the discount may be applied off the price of thestarter pack (being the monthly headline price) or off the first specifiednumber of recharges.It may also involve increasing the time required fora subscriber to recharge their plan, which amounts to a price decrease; and

(4)price competition also entails maintaining the price in circumstances wherethe quality of the product has improved considerably.

139In addition to price competition, MNOs and MVNOs also compete by offeringsubscribers greater value in terms of the inclusions in their plans. This may includeincreasing the amount of the data allowance or the value of the international callssubscribers are entitled to within their plan.

141The pre-paid segment exhibits considerable price competition. This arises from thestrategies implemented by Telstra, Optus and Vodafone to target this segment usingtheir own brands as well as their second brands and the presence of a significantnumber of MVNOs offering a wide variety of products.

142The second brands of Vodafone, Telstra and Optus offer plans for less than $30 andtarget the value or price sensitive, or low end, segment of the market.Forexample, each of Belong and Boost Mobile offers plans for less than $30. Thoseplans include unlimited national calls and text, unlimited international calls tospecified destinations, and a data allowance.They also offer their customers, atthese low price points, access to the Telstra 4G network. Vodafone also targets the lowend segment with its Kogan and Lebara brands,while Optus uses its ownbrandas well as amaysimto target market share in the pre-paid segment.

143To win customers, MVNOs offer a range of plans at different price points, butfocus primarily on the pre-paid segment and target customers who wish to pay lessthan $30 per month.In order to differentiate, MVNOs focus on competing onprice and customer support.To that end, the MVNOs have been particularlyeffective in introducing plans for less than $30, in many cases, for as little as $10 to$15 per month. There are numerous examples of products being introduced at thatprice point including plans offered by amaysim,Aldi,Kogan,CatchConnectand Exetel.Competition continues to increase with the entry ofadditional MVNO competitors.

Post-paid segment

144A feature of mobile markets is that they are also characterised by significantproduct differentiation. Economists distinguishbetween horizontal differentiation (where some customers will choose one brandand other customers a different brand even if they cost the same) and verticaldifferentiation (where one product is of higher quality and would be preferred byall customers if priced the same as the lower quality product).Differentiationmay give rise to pockets of market power if some firms manage to differentiatethemselves substantially from others. If one operator has a substantiallybetter network than others, it will face limited competitive constraints.

145Each of Vodafone, Telstra and Optus has employed strategies designed to differentiatetheir network and product offerings in the post-paid segment. While the quality ofeach network has improved, prices (and quality adjusted prices) have continuedto fall.While Telstra charges a premium relative to Vodafone and Optus,nevertheless the post-paid segment also exhibits significant price competition.

146Telstra’s long term strategy has been to differentiate its network with a view tocharging a premium.

147Each of Vodafone and Optus has been competing aggressively for post-paidsubscribers since at least 2014. This is no doubt due to the fact that this segment isthe most profitable for the MNOs: the vast majority (around XX%) of Vodafone’s mobileservices revenue comes from post-paid products rather than pre-paid products. Telstra and Optus’post-paid subscribers and average revenue per user is higher forpost-paid than pre-paid.

148Following Vodafail, Vodafone has sought to win back its market share loss.Vodafonehas implemented various pricing strategies ahead of Telstra and Optus in thissegment,as well as investing to upgrade the quality of Vodafone’s network.Optushas also invested considerable sums of money in its network and in content for itssubscribers, with a view to differentiating its network. However, notwithstandingthis improvement in network quality, Optus has still been pricing aggressively. As a general proposition, the market is characterised by participants seeking to ‘give more,charge less’.

149Telstrahas also sought to meet the competition in the post-paid segment by itself engagingin price competition.

150Competition in the post-paid segment has also been characterised by considerablecompetition between Vodafone and Optus, where reductions in price or increases ininclusions such as data allowances by one competitor are met by the other.

152Competition in the retail mobile market also manifests by MNOs and MVNOsregularly increasing the attractiveness of their offers by offering subscribersadditional inclusions.Given that unlimited national calls and text are now afeature of most pre-paid and post-paid plans, including those at low pricepoints,the competition focuses on:

(1)increasing the amount of data included in a plan.MNOs and MVNOs offersubscribers additional data by changing the advertised ‘base inclusion’ in theplan or offering a promotion such as an additional 10 GB on a $30 pre-paidplan for the first three recharges;

(2)increasing the value of international calls included in a plan.This includesintroducing unlimited international calls and text messages as a feature ofthat plan for a specified number of countries;

(3)offering better overseas roaming;

(4)offering subscribers data free downloads for particular content such as dataused to stream movies on Netflix or Stan or to stream music fromapplications such as Apple Music and Spotify; and

(5)offering free content to subscribers on a particular plan. This may be contentsupplied by a third party provider or content offered by the mobile servicesprovider itself.

153Analysis conducted by the ACCC comparing dataallowances between 2013-2014 and 2017-2018 concluded that data allowances hadincreased considerably during that period. The ACCC found that, for pre-paidservices, the median and mean data allowances increased from 1 GB and 1.9 GBrespectively to 7 GB and 11.5 GB respectively in that period. For post-paid, theACCC found that median data allowances had increased from 1.5 GB to 6 GBduring the same period, with mean data allowance rising from 1.7 GB to 14.2 GB.

154The data allowances offered by MNOs and MVNOs only continued to increasebetween 2017 and 2019 for both pre-paid and post-paid products.

155Similarly, promotional activity offering consumers ‘bonus data’ is now a regularoccurrence in the market.

156The post-paid segment has also now moved to endless data plans. This was firstintroduced by Vodafone in May 2018, when Vodafone introduced an ‘endless’ data plan.As with all other mobile plans, this plan provided subscribers with a dataallowance at unrestricted data speeds. However, where the subscriber exceededtheir data allowance, they could continue to use data without being charged forthe excess. However, that additional data usage was supplied at a slower speed of1.5 megabits per second(‘Mbps’).At around the same time, Telstra introduced a similar endless plan forits 12 month SIMO post-paid plans at the $69 per month price point.However, inJune 2019, Telstra extended this endless plan feature to all of its post-paid plansincluding its cheapest post-paid plan commencing at $50 per month.XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX.

SPECIFIC CHARACTERISTICS OF THE RETAIL MOBILE MARKET

157I now come to consider further and more specific characteristics of the retail mobile market relevant to these proceedings, which I find exist based upon the evidence led in these proceedings.

The MNOs and their networks

158It is worth stressing again that:

Telstra is the largest MNO by a considerable margin, supplying approximately 17million mobile customer services, with a retail mobile market share of about 42%. The geographic coverage of Telstra’s mobile network substantially exceeds that of Optus and Vodafone, covering around 2.4 million square kilometres and reaching around 99.3% of Australia’s population.

Optus is the second largest MNO, supplying approximately 10 million mobile customer services, with a retail mobile market share of about 28%. Its network covers around one million square kilometres and reaches approximately 98% of Australia’s population.

Vodafone, by contrast, has the third largest mobile network, with only approximately six million mobile customer services. Its geographic coverage is substantially smaller, covering around 600,000 square kilometres, and the network only reaches 96% of Australia’s population.

159A competitive advantage that Telstra and Optus have over Vodafone and TPG is their relatively larger spectrum holdings. I will come to consider spectrum later in these reasons, but in my view there is no doubt that the mere having of larger quantities of spectrum gives a competitor an advantage.

160Telstra and Optus each have significantly larger quantities of spectrum than Vodafone or TPG in an absolute sense. There is a linear relationship between the amount of spectrum that an MNO has and the peruser data speed its mobile network provides. All other things being equal, more spectrum means that an MNO can deliver more capacity to users relative to other MNOs. If an MNO has less spectrum than another MNO, it has to incur the cost of investing in more cell sites, or better spectral efficiency of its RAN equipment, in order to deliver the same capacity as that other MNO.

161Mr Teoh considered that TPG is and was at a competitive disadvantage to the incumbent MNOs with its relatively poor amount of spectrum. Professor Björnson said that if TPG deployed a mobile network with the same infrastructure as existing MNOs, the only differentiating factor would be the spectrum holdings, and TPG’s peruser data speeds and area capacity would be approximately 18% to 30% lower than those achieved by the existing MNOs. Mr Teoh referred to the limited spectrum and directly linked that limitation to the increasing demands for data and speed:

Then we look at what we have, the 30 megahertz of the 3.5. We can’t do it.Even if I put up the 5G today, even there is a solution like what you say, there is no security ban, I put up the… 4G, 5G, I put up the massive MIMO. I’m not able to do it even today, even to compete with Optus.And the market in three, four, five years’ time, people demand for capacity, demand for speed, because of the user demand and also because of the technology development.So you envisage that the usage and the speed would go up. But… there is a limitation because of the spectrum constraint that we have. So we will never get there. And what Telstra and Optus can do is keep driving us – this competition in Australia. And we can’t do that with our limited spectrum of 30 megahertz of the 3.5 we will never be able to do that.

162In addition, the kind of spectrum that an MNO holds is significant, because spectrum propagation characteristics differ between low, mid and high band spectrum. In particular, low band spectrum (between 700 MHz and 1 gigahertz (‘GHz’)) propagates further than mid or high band spectrum, and penetrates obstacles such as trees more easily. This means that low band spectrum leads to higher peruser spectral efficiency and better geographic coverage than mid or high band spectrum. This is commercially attractive to MNOs, because fewer cell sites are required for providing coverage over a geographic area when using low band spectrum compared with mid or high band spectrum, and it provides better in-building coverage, which is advantageous in dense urban environments. In this regard, Telstra and Optus have more than twice the amount of low band spectrum as Vodafone, and four times the amount of low band spectrum as TPG.

The competitive advantage conferred by the ability to bundle, particularly in the business segment

164Another competitive advantage that Telstra and Optus have over Vodafone is their strong ability to bundle retail mobile services with fixed mobile services. Mr Berroeta gave evidence that Telstra has a ‘leading position’ in mobile and fixed services, which means it is well placed to offer bundled products that, in his experience, are appealing to customers. Likewise, as at June 2018, Optus had a 15% share in the fixed broadband market, which gives it a strong ability to bundle fixed and mobile services, too. By contrast, Vodafone has very limited fixed telecommunications infrastructure and only offers retail broadband services through NBN, for which its current customer base is around 70,000 subscribers. This limits Vodafone’s ability to offer bundled products.

165Macquarie Telecom’s Mr Davies, who was called by the ACCC, agreed that bundling fixed and mobile services remains a feature of the business and enterprise segment. He agreed that Vodafone is not one of Macquarie Telecom’s top four competitors, and does not compete strongly for services in the business segment, except for mobile services, and in fixed services is not relevant ‘whatsoever’. This is because Vodafone does not offer the full service including data, voice and co-location services.

166Macquarie Telecom does consider TPG as one of its top four competitors in the business segment. This is because TPG has a fixed broadband product for business customers, and provides voice and internet services with extensive fibre transmission. It also provides a ‘TPG Fibre 1000’ product with a service level agreement, whereas Vodafone supplies none of these things.

Vodafone’s competitive position relative to Telstra and Optus due to Vodafail

167In December 2010, and continuing for a number of years after that, Vodafone experienced the Vodafail episode. As I have already indicated, Vodafone experienced serious network issues including discontinuities in coverage, its roaming agreement with Telstra coming to an end, and high rates of dropped calls and poor internet connectivity due to rising data traffic. Poor customer experience was widely reported, and Vodafone lost approximately two million customers and suffered significant brand damage.

168Since then, Vodafone has taken a number of steps to improve its service quality that have re-positioned Vodafone as a meaningful competitor in the retail mobile market. This has brought some improvement in Vodafone’s customer perception: Vodafone has become a meaningful competitor to Telstra and Optus. Likewise, Mr Teoh gave evidence that Vodafone has been very competitive in the metropolitan areas of the east coast of Australia.

169However, Vodafone’s market share has not returned to its pre-Vodafail levels, and Vodafone is yet to become profitable. Mr Berroeta gave evidence that Vodafone has never been able to fully recover from Vodafail. I accept Mr Berroeta’s evidence. When challenged about his ‘gloomy picture’ of Vodafone’s enterprise business’ performance with the fact that Vodafone has won major clients and awards, Mr Berroeta replied: ‘[m]ore awards than clients, I have to say’.

The competitive position of the MVNOs and TPG in the retail mobile market

170As I have mentioned, MVNOs effectively resell the mobile service of an MNO, and hold the customer relationship. In addition to this, the MNOs operate secondary brands, which add a further level of competition. For example, Telstra’s Belong brand entered the retail mobile market in October 2017, Optus has the Virgin Mobile brand (which it has announced it is closing), and Vodafone has the Lebara brand.

171The principal ways in which MVNOs compete with each other and with the MNOs are on price and customer support, but their prices are affected by the economics of their wholesale arrangement with the MNO that supplies to them. The MVNOs provide a different value proposition to the MNOs, in that they usually do not offer the full suite of services provided by an MNO, such as retail stores, handsets and other service add-ons.

172It is common ground that TPG’s current competitive position as an MVNO is minimal. TPG has a 1.5% retail market share. TPG’s Chief Operating Officer, Mr Levy, gave evidence to the effect that TPG provides immaterial competitive constraint as an MVNO, and that the loss of TPG as an MVNO could not lead to a substantial lessening of competition in the retail mobile market. In particular, over the past few years, TPG has not been able to negotiate more competitive plans at the wholesale level with its MNO supplier, Vodafone, that would allow it to compete with the new entrant MVNOs offering greater data inclusions at lower average revenue per user (‘ARPU’). TPG has also experienced difficulty in negotiating competitive wholesale plans with Optus for its iiNet MVNO brand. The increased competition, and the difficulties that TPG has faced in negotiating more competitive plans with Vodafone and Optus, have coincided with declines in TPG’s MVNO customer base.

The key drivers of competition in the retail mobile market

Price and data inclusions

173Mr Berroeta gave evidence that a key driver of competition in the retail mobile market is the ‘headline price, data inclusions, bonuses, discounts and handset related payments’ of the mobile plan.

174Many of the lay witnesses gave evidence that, over the past few years, retail mobile prices have fallen, and that the data inclusions have been increasing at each price point.

Network coverage

175The lay evidence demonstrated that network coverage, which is reference to the geographic area within Australia serviced by an MNO, or the proportion of the Australian population that the network can reach, is another driver of competition in the retail mobile market. ProfessorBjörnson said that the main challenge in mobile networks is to provide ‘good geographical coverage’, and that while data speeds and capacity have improved greatly over time, ‘the lack of coverage at certain locations is still a concern that many people experience daily’.

176Mr Berroeta said that customers demand mobile connectivity when they go from one location to another, and will be dissatisfied if continuous coverage is not provided. He said it is a significant aspect of competition between MNOs.

177In a similar vein, Mr Levy said that one limitation of TPG’s planned mobile network was its limited coverage, which would be less than that of at least Telstra and Optus. He gave evidence that the likely coverage gaps in TPG’s planned mobile network meant that any mobile offer made by TPG needed to offer a sufficiently low price and high data inclusion to compensate for this deficiency and to make the network appealing.

178Likewise, Exetel’s Mr Ward accepted that competition in the retail mobile market is focused on coverage in addition to data inclusions, so much so that Exetel markets itself on the basis that its customers have the benefit of Optus’ 4G network. Macquarie Telecom’s Mr Davies also agreed that for its customers (which are business and enterprise customers), network coverage is an important matter, particularly in building coverage.

179As alluded to already, Telstra and Optus have a substantial advantage over Vodafone, in terms of both the geographical and population coverage of their networks. The network coverage of TPG’s planned mobile network would have been substantially inferior still, relative to all of the MNOs, both during the initial roll-out and after the initial roll-out had been completed.

180When TPG announced its initial unlimited product on 9 May 2018, which it expected to launch in the third or fourth quarter of 2018, TPG’s coverage was to be limited to 39 metropolitan suburbs. Further, Phase 1 of TPG’s roll-out was to be even more narrow, being limited to the ‘366 Polygon’ in Sydney (which covered the CBD, eastern suburbs and a corridor of western Sydney extending to Homebush), and the ‘260 Polygon’ in Melbourne (which covered the CBD and inner south and north suburbs).

Network quality

181Mr Berroeta gave evidence that another significant driver of competition in the retail mobile market is network quality which can be a significant driver of customers switching from one MNO to another. This refers to factors which I have already mentioned such as voice quality, ability to establish a call, ability to maintain a call while stationary or while mobile without the call dropping out, data speed, latency and reliability of the network in general.

Data traffic growth and its impact on competition during the next five years

182There has been consistently substantial growth in the volume of data consumed by Australian mobile customers over the last three to four years. For instance, the ACCC Communications Market Report 2017-2018 records that between the quarter ended 30 June 2014 and the quarter ended 30 June 2018, total data volume downloaded by mobile phones increased from 38,734 to 246,765terabytes. This translates to a compound annual growth rate (‘CAGR’) for total data downloaded by mobile phones of approximately 60% during that period. Mr Smith gave evidence of mobile data demand increasing by 50%to 60% per year.

183Likewise, there is evidence that the data traffic growth experienced by MNOs in recent times has also been substantial.

Trends in ARPUs and data inclusions on mobile phone product

184In response to this rapidly growing data usage amongst mobile customers, MNOs and MVNOs are now offering significantly larger data inclusions at lower price points than they did in 2017.

185For example, the ACCC’s Communications Market Report 2017-2018 records a significant upward trend in mobile data allowances in recent years. When price and other non-price characteristics (ie contract length, SMS inclusions etc) are held constant, data allowances increased by approximately 172% between 2016-2017 and 2017-2018. Between 2016-2017 and 2017-2018, mobile data allowances for post-paid mobile phone plans increased by 91%, while pre-paid mobile services increased by 153%. Further, the data inclusion growth rate was higher between 2016-2017 and 2017-2018, compared with the two years prior.

186At the low-ARPU end of the market during the past two years, many MVNOs have significantly increased the data inclusions they offer in retail mobile plans. For example:

(1)In October 2017, Exetel was offering customers 1GB of data for $9.99 per month on a month-to-month SIMOplan. As at July 2019, Exetel was offering 10GB of included data on a $24 per month plan. As compared to March 2018, Exetel now offers 3GB instead of 1.5 GB at $14.99, 10GB instead of 6 GB at $24.99, and 18 GB at $29.99 instead of 10 GB at $34.99.

(2)In October 2017, amaysim and Belong were offering customers 5GB of data inclusions for $30 per month on a month-to-month SIMO product. As at July 2019, Belong was offering 10 GB of included data on a $25 per month plan and amaysim was offering 5 GB of data on a $20 per month plan.

This trend is consistent amongst other MVNOs, such as Dodo, Vaya, Kogan Mobile and Boost Mobile.

187Further, MNOs have started to compete at the lower ARPU end of the market:

(1)Optus has increasingly started to offer lower ARPU plans, offering a pre-paid SIMO plan with up to 35 GB of data for $30 per month, and SIMO plans for $40 per month with 40GB of data inclusions on its 12-month contract plans respectively.

(2)In June 2019, Telstra launched new data-only mobile plan contracts which offer between 5GB and 100GB of data inclusions per month for between $15 and $75 per month.

188At the higher ARPU end of the market, MNOs have also increased their data inclusions by significant amounts.

189There has also been significant downward pressure on mobile service ARPUs during the past two years. In this regard, Mr Martin gave evidence that post-paid ARPU, pre-paid ARPU, mobile broadband and blended ARPU have fallen significantly for both Telstra and Optus each year over the three years to June 2019. For example, Telstra’s post-paid ARPU has fallen by about $7.30 per month (4.1% CAGR) and Optus’ by about $14 per month (9.4% CAGR) over those three years. Optus’ pre-paid APRU has fallen by nearly $6.50 per month (9.7% CAGR) over the three years.

190Likewise, amaysim’s financial reports from the 2015 financial year to the first half of the 2019 financial year demonstrate the continuing decline in its ARPU.

191I expect that these trends will continue in the future. Mr Martin, an experienced telecommunications analyst with over 25 years’ experience advising investors on the sector, gave evidence that competition in the Australian mobile market is likely to continue at a high level as Telstra and Optus continue to increase data allowances at given price points. Mr Levy and Mr Teoh also gave evidence which supported the expectation that these trends will continue.

THE FUTURE WITHOUT THE MERGER

192I now turn to the future without the merger.

ACCC submissions

193The ACCC submitted, in respect of the futurewithout the merger, the following overall position.

In relation to TPG

194TPG has, or will shortly have, available a technicalsolution to enable it to recommence the roll-out of a predominantly small cell 4G mobilenetwork with a 5G upgrade path. It has sufficient spectrum to support such a network. Itwill likely have the financial capacity to roll-out a mobile network. If TPG considers aroaming agreement to be fundamental to recommencing a roll-out, Vodafone and TPG havenot demonstrated that TPG could not obtain a roaming agreement on commercial terms.TPG could never reasonably have expected to come to 5G early, and a failure to roll-out5G technology early is unlikely to be determinative of TPG’s success as an MNO. Thedifficulties TPG may face in recommencing a roll-out would not be insurmountable, asTPG was effectively addressing these difficulties in its initial roll-out with Huawei. It has not been demonstrated that, absent the merger, TPG would not be willing to roll-out a network.

195If TPG does roll-out a mobile network in the next five years, it is likely to be a vigorousand effective competitor for price-sensitive customers in metropolitan areas.It hasconsistently acted as a vigorous and effective competitor in the markets in which it hascompeted, adopting an aggressive approach to pricing and introducing innovative retailproducts. It has had some success as an MVNO by adopting similar strategies, includingaggressive pricing and promotional offers. It has affirmed its intention to adopt adisruptive MNO strategy in Australia on many occasions. It has incentives to focus onwinning market share through aggressive price competition, and the other MNOs haverecognised the likelihood that they will be forced to follow to retain customers.

196Expanding on these contentions, the ACCC contended as follows in relation to the competitiveness of TPG.

197The ACCC accepted TPG’s mobile network would not be of the same quality as those of the other MNOs. Mr Wright’s evidence was that the 4G network that was being rolled out by TPG would have been of a lower standard and quality of performance relative to other MNOs in terms of its geographic coverage and consistency of service. He predicted it would only provide coverage to 60% of the Australian population, and would be concentrated in the metropolitan areas of major capital cities. Although it would likely provide satisfactory outdoor coverage both in the CBD and the balance of the small cell area, there would be areas of poor indoor coverage away from the small cell locations, deeper indoors and on upper floors. Coverage consistency was also expected to be variable owing to the antenna design. In-building coverage in CBD areas would be improved by building in-building coverage systems. This requirement was anticipated in TPG’s original roll-out, whereXXXX XXXXXXX was budgeted over three years for in-building coverage systems. There would also be coverage holes until the roll-out was complete.

198Similar observations apply to Mr Wright’s proposal for how TPG could upgrade its 4G network to a 5G network, although the addition of 5G ‘mid-point’ cells is likely to provide some additional 5G coverage into buildings near to the small cell locations compared to TPG’s ceased 4G network roll-out.

199The ACCC submitted that TPG was well aware of the limitations of the network TPG was building. Mr Levy’s evidence was that from the beginning of the mobile strategy, Mr Teoh told him that TPG’s network would not provide consistent or widespread coverage and that the network would have gaps in coverage during the roll-out period. TPG’s strategy was to appeal to price-sensitive customers who, for a lower price, would be willing to sacrifice quality. The evidence from a number of MVNO witnesses was that customers would be willing to trade quality for price.

200In the ACCC’s submission, if TPG does roll-out a mobile network in the next five years, it is likely to be a vigorous and effective competitor for price-sensitive consumers in metropolitan areas.

201To date, TPG has been an effective and successful competitor in markets adjacent to the retail mobile market, adopting an aggressive approach to pricing and introducing innovative retail products. TPG has also had some success as an MVNO, adopting similar strategies including aggressive pricing and promotional offers.

202TPG’s consistent strategy has been to ‘lead’ the market by introducing services that are innovative and disruptive. TPG has frequently done so by offering products at lower price points than its competitors’ products – that is to say, by pricing aggressively. TPG has most recently done so in Singapore, where it has entered as an MNO. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

203The ACCC contended that TPG affirmed its intention to adopt a similarly disruptive MNO strategy in Australia on many occasions. Consistently with that intention, in May 2018, TPG announced its first mobile offering to the market as an MNO. The product was to be free for TPG customers for the first six months, and would thereafter cost $9.99 until approximately January 2020 (with further increases after that time); it included unlimited data, with the first 1GB supplied every day to be supplied at 4G speeds; it was to be available in the third or fourth quarter of 2018; and it was to initially provide mobile coverage in the CBD areas and some surrounding suburbs of major Australian cities. In the press release accompanying the announcement, Mr Teoh said that the plan ‘signal[led] a new era of competition in the mobile market and [would] undoubtedly bring great benefit to Australian consumers’. Approximately two weeks after the plan was announced, the minutes from the TPG Board meeting record that the plan had ‘created quite a stir in the market’, and that the Board was confident that it would ‘be difficult for incumbents to compete with on price’.

204Both Mr Teoh and Mr Levy suggested that TPG’s initial mobile offering would now be less attractive to customers, in light of ‘the availability of … lower ARPU plans … offering significant data inclusions (of up to 10GB) and the full suite of mobile services’. They suggested that TPG would be required to rethink its proposal in order to put forward an offering that would be disruptive. Mr Levy proposed that ‘TPG would need to offer a mobile product with data inclusions of around 60GB/month or more in order to replicate an “unlimited” data product vision’. In the ACCC’s submission, these claims should be rejected.

205It was submitted that the analyses that Mr Levy exhibits to his first affidavit demonstrate that, at all material times, TPG’s initial mobile offering would have offered substantially more data than any other mobile plan on the market at that price point. As at July 2019, mobile offerings which included 30GB per month of data were in the range of approximately $30. At that time, amaysim offered 30 GB per month for $30 on a month-to-month plan; Optus and Vodafone offered 35GB per month for $30 on a pre-paid plan; and Vaya offered 30 GB per month for $44 on a month-to-month plan. In the $10 to $15 plan range, data inclusions were between 1GB and 3 GB per month. Understood in this light, TPG’s proposal – 30 GB per month at 4G LTE speeds, and thereafter unlimited throttled data, first for free, and then for $9.99 per month – still seems to be highly competitive. The evidence of Messrs Baker, Davies and Ward, who are associated with MVNOs, is to similar effect. The ACCC contended that this is unsurprising –XXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

206Understood in light of those same competitor analyses, Mr Levy’s suggestion that TPG ‘would need to offer a mobile product with data inclusions of around 60GB/month’ seems flawed. The ACCC contended that Mr Levy’s suggestion is not supported by any analysis – it is pure assertion which is said to be based on his ‘monitoring of the market’. However, as at July 2019, plans providing 60GB per month or more cost at least $50. The ACCC submitted that it does not seem correct to suggest that TPG would presently need to offer this amount of data to compete for price sensitive customers.

207In respect of the prices that have been announced to the market by Telstra and Optus for 5G products, Mr Levy suggested that TPG’s mobile offering would have to compete with Optus’ $70 5G home broadband fixed wireless plan. However, the ACCC submitted it is clear that these products are not meaningful alternatives, either on price or product functionality. MrTeoh also referred to Telstra’s 5G mobile phone plan, by which Telstra customers can access 5G for free until 30 June 2020 as part of their paid plan, and for an additional $15 per month after that time. Telstra’s $15 for 5GB plan, referred to by Mr Teoh in cross-examination is a data only plan that offers significantly less data (5GB against 30GB) for a higher cost than TPG’s offer.

208As to how TPG would price its plans if it were to enter as an MNO, it was submitted that TPG’s incentives would be quite different from those of Telstra, Optus and Vodafone. TPG would likely focus primarily on winning new customers, with little regard for its small existing customer base. It would not need to be concerned about balancing the potential for winning new customers against the margins earned on existing customers. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XX XXXX XXXX XXXX XXXX XXXX:

then it is likely that TPG will be a vigorous and effective competitor if it determines to roll-out a 5G upgradeable mobile network with an alternative vendor.

In relation to Vodafone

211The ACCC contended that over the next five years, Vodafone will remain an effective competitor to Telstra and Optus,particularly in metropolitan areas.Vodafone has not established that congestion on itsnetwork will, absent the merger, result in customer experience being impaired, let aloneimpaired to a material degree that will prevent Vodafone exercising a substantial competitiveconstraint on Telstra and Optus.

212It was submitted that the likely congestion on Vodafone’s network is at significantly lower levels than thoseassumed by Vodafone’s lay witnesses, and which underpin their concerns about Vodafone’scompetitive position in the future. Vodafone has already taken steps to manage congestionand has a well-developed RAN Refresh program that will be rolled out over the nextcapex envelope. Vodafone’s shareholders have repeatedly reiterated their support for Vodafone.

213It was also submitted by the ACCC that there is no evidence that Vodafone is managing its offering to shed any segment of itscustomers so as to relieve demand on its network, or that it will have to do so in thefuture. The impact of Vodafone being later to 5G than Telstra or Optus is unsubstantiated,and the Court cannot be satisfied it would be material. Vodafone will continue to focus onmaking competitive offers to metropolitan mobile consumers, while seeking to grow itsenterprise unit, supporting those efforts with its program of works on its network(including the RAN Refresh program) and the various other business initiatives it pursuesto differentiate itself in the market.

Consideration

214In light of these submissions it is convenient to consider separately the various issues raised by the ACCC, always remembering that the burden of proof remains with Vodafone in seeking the declaration. As I have come to the view that it is extremely unlikely and there is no real chance that TPG will roll-out a retail mobile network in the relevant future, I will consider the position of Vodafone later on the basis that there is no merger but contrary to my view, TPG does enter the retail mobile market.

TPG’s current position and the next five years without the merger

215There is no doubt that for a number of years TPG evinced a strong commitment to rolling out a mobile network. The evidence and chronology of events support the contention of the ACCC that Mr Teoh and TPG were prepared to enter what they then considered a worthwhile venture. I do not accept that at the time they were prepared to ‘chance their arm’, nor do I think they acted in a foolhardy way at the time. They had a vision, one which they sought to implement, but which had its own difficulties and obstacles which became apparent as the roll-out progressed.

216The history of events supports this conclusion that TPG had a strong commitment to commence and continue a roll-out of a mobile network from 2016.

217TPGacquired 3 x 5 MHz of 1800 MHz spectrum in February 2016 for $84.7million. At the 29 January 2016 TPG Board meeting,the Board expressed the view that ‘[l]ong-term we have to be in the mobile space – the future is mobile’.Whilst this comment must be put in the context of the time and TPG aspirations at that time, I interpolate that there is no doubt at a general level the statement ‘the future is mobile’ seems still a reasonable and likely prediction as to the future of telecommunications in Australia. However, mobile in Australia is not the complete future and as far as Mr Teoh and TPG are concerned, there are other options to pursue to which I will come to later in these reasons.

218Returning then to early 2016, TPG actively pursued the acquisition of the 700 MHzspectrum.In March or April 2016, TPG approached the Commonwealth Governmentto express an interest in purchasing 2 x 15 MHz of 700 MHz spectrum,being spectrum which remained unsold after the ACMA auction in 2013. In April 2016, Mr Teoh informed the TPG Board that this was ‘the best qualityspectrum and could cost ~$800mbut would be very valuable to theCompany’.In August 2016, Mr Teoh wrote to the Assistant Secretary ofthe Spectrum Branch at the Department of Communications and Arts,offering to license that spectrum for approximately $857 million.In thatletter, Mr Teoh informed the Assistant Secretary that he believed it would‘greatly benefit Australian consumers if a fourth player enters the mobilecommunications market’.The Department did not ultimately accept the offer.

219Between 26 August 2016 and the commencement of the 700 MHzspectrum auction in April 2017, the TPG Board met a number of times,and discussed the importance of a mobile strategy to TPG.By way ofexample, on 24 February 2017, Mr Teoh told the TPG Board that the 700MHz auction was ‘a very important opportunity for the Company and avery serious decision for the Board’.Mr Teoh told the Board that ‘themobile market is massive and future industry growth will be driven bymobile’, and said that ‘[t]he size of the initial investment in spectrum andnetwork roll-out will cause some financial pain for a few years and thenetwork roll-out will be a challenging exercise, but if we do it successfully,we will be in a fantastic position in the industry’.On 16 March 2017, theTPG Board discussed ‘the strategic importance to the Group ofproceeding with the [mobile] strategy’, and discussed a bidding limit of$1 billion, although Mr Teoh indicated that the limit ‘may need to behigher’.The Board approved a $1 billion bidding limit, recognising thatat that price, ‘the Group would have an unfunded financial commitment of~$1.1B over and above its existing debt facilities’.

221TPG successfully acquired 2 x 10 MHz of 700 MHz spectrum for the priceof $1.26 billion on 6 April 2017.On an‘MHz/pop basis’, this was the highestprice paid for 700 MHz spectrum anywhere in the world.It was overdouble the price paid by Telstra and Optus for 700 MHz spectrum in 2013,and by Vodafone for the remaining 700 MHz spectrum in the 2017 auction.

222It is worth noting that as at April 2017, Mr Teoh considered that no matter the outcome of the 700 MHz spectrum auction, TPG would be spectrum-poor relative to other MNOs. This meant it needed to plan its network to maximise capacity, while maintaining low capex, particularly if it were to be able to make disruptive offers in the marketplace.

223During the network design process in 2017, through discussions with Mr Hanly, it became clear to Mr Teoh that TPG needed a primarily small cell site network installed on utility poles in contrast to a predominantly macro site network. This would multiply the use of its limited spectrum holdings and increase its network capacity, as well as roll-out its network as fast as possible in a cost effective manner. The Board minutes of 28 April 2017 record that small cells on poles ‘could be more cost effective’ and ‘increases capacity’. The Board minutes of 26 May 2017 record that a small cell approach ‘will increase the capacity we can provide’. Mr Wright also said that this was his understanding of why TPG switched to a predominantly small cell site network plan.

224By September 2017, TPG’s strategy had evolved to rolling out a network predominantly comprising small cell sites in metropolitan areas, complemented by a lower number of macro sites. This change in strategy was principally motivated by TPG’s need to maximise the capacity it could generate from its limited spectrum holdings.

225Then returning to April 2017, after TPG successfully acquired 2 x 10 MHz of 700 MHz spectrum,TPG engagedwith Macquarie in respect of the capital raising to support its purchase of thespectrum.

226There is no doubt that TPG made a significant investment in spectrum where it did not have a firm plan as to how its mobile network roll-out would unfold.The proposal that TPG announced to the market on 12 April 2017 was that it wouldroll-out a network of 2,000 to 2,500 macro cell sites, plus small cell sites, across thecountry.However, prior to April 2017, MrTeoh had been concerned that ifTPG only used macro sites, then TPG’s limited spectrum holdings would mean that itwould not have enough network capacity to be competitive over time with otherMNOs.Shortly after the completion of the 700 MHz auction, TPG begandiscussing the merits of deploying a primarily small cell network– a plan that TPGannounced to the market in September 2017.Similarly, at the time that TPGcommitted to purchase the 700 MHz spectrum, TPG had not actually selected a vendor toprovide the equipment for its network. I will return to this issue.

227From April 2017 until the cessation of TPG’s roll-outon 29 January 2019, TPGworked through a number of issues that were presented in respect of itsnetwork roll-out.

228As I have said, TPG needed to revise its roll-out plan in relation to the number of macro sites andsmall cell sites in scope.Then TPG worked with Huawei (a vendor of mobile network technology that designs, manufactures and supplies telecommunications equipment) throughout this process to develop anappropriate technical solution. Even after Huawei provided TPG with a 4G small cell solution, TPGfrequently had to tailor the equipment that it intended to install onparticular sites in order to meet the requirements of particular sites(including volumetric requirements and requirements imposed by localCouncils). On occasions, TPG had to select different small cellsites because of the limitations of a particular site, for example, itsmaximum height or the equipment already installed at that site.Other issues arose during its network roll-out, including ensuring sufficient power supply atsmall cell sites, and issues relating to community opposition and complexities withheritage-listed areas.

229When TPG decided to roll-out its network in 2017, I find that Mr Teoh and TPG did not anticipate the full extent of the roll-out difficulties that they ultimately experienced during 2017 and 2018.TPG did not view these practical difficulties as fatal to its roll-out until the Board’s decision on 29 January 2019. However, these difficulties certainly increased the risks associated with the roll-out. TPG’s past experience of these difficulties is instructive for what would be involved in any new network roll-out and the risks and delays that might be expected. Mr Teoh said that these issues were among the unsolved problems that deprived TPG of a business case for any new roll-out.

230In addition, I do not accept that the landscape facing TPG today and the next five years, or the circumstances in which TPG is currently doing business or will do business, or the commitment to rolling out a mobile network,are similar to that existing in April 2017 and following into January 2019. The current difficulties are more problematic, and are obviously viewed in that light by Mr Teoh.

231The Court has sought to evaluate the facts and the market conditions that are present today and can be reasonably predicted in the future five years. As I have already indicated, the experts, including Mr Smith, recognised the likelihood, nature and timing of any network roll-out that could or would be undertaken by TPG is a factual question. The experts can and did act on certain assumptions. The Court has relied upon the evidence of those operating in the retail mobile market, keeping in mind the focus being on what is commercially realistic. It is true the economist can describe in general terms how a rational business person may act in the future, and to that end refer to various ‘objective’ matters that may influence the rational business person. In these proceedings, that person is Mr Teoh. Nevertheless, as each of the economists recognised, the Court, in light of all the evidence, including that of market participants and MrTeoh himself, must make the evaluative judgement.

232On the important issue of timing, the ACCC in its written submissions set out certain factors it contended remained unchanged from the 2017 position to the current position. These submissions were largely based upon the evidence of Mr Teoh. I will return later to MrTeoh and his evidence in the context of various matters that need to be assessed.

233However, I accept that if you look at the position Mr Teoh took in 2017 in deciding to roll-out a retail mobile network with the position now, some of the advantages held by TPG to value the opportunity to become an MNO are still there: TPG’s assets and experience, some competitive advantages relative to the existing MNOs, the fact that TPG is not required to support legacy networks and an opportunityto win market sharethrough aggressively priced plans with no existing customer base ARPU to protect. However, this is only one side of the ledger – other considerations impact on any commercial decision that may be made now to roll-out a retail mobile network.

235However, these are all subject to what Mr Teoh and TPG have in mind for the future, and their assessment of whether they should or are able to take advantage of any of these opportunities.

236In order to understand Mr Teoh’s and the TPG Board’s current positions, it is necessary to go back to the decision and the reasons for TPG determining not to continue the roll-out of the mobile network. There has been no suggestion that the basis of the various relevant decisions of the Board were not actually held at the time of each Board decision.

237The relevant background event was that on 23 August 2018, the Commonwealth Government imposed the Security Guidance. From August 2018, TPG did not order any more equipment from Huawei, although it continued to install what it already had.

238At its meeting on 29 January 2019, the TPG Board resolved to cease the roll-out of its mobile network in Australia. Mr Hanly presented a paper at that meeting and explained that the Security Guidance meant that TPG’s upgrade path to 5G had been blocked. Mr Teoh recommended the Board cease the roll-out because it made no commercial sense to roll-out a 4G network that could not be upgraded to 5G. Following the Board meeting, TPG announced its decision to cease its mobile roll-out to the market. The announcement said that ‘a key reason’ was that the upgrade path to 5G was blocked.

239Following the decision on 29 January 2019 to abandon the network roll-out, TPG addressed the accounting implications of that decision. On 26 February 2019, TPG announced to the market that it had no business plan or strategy for using its spectrum licences on a standalone basis and, accordingly, the carrying value of those licences was required to be reassessed. TPG wrote down the value of its spectrum licences by $92 million and wrote off the mobile network capex it had incurred to date of $76 million.

240Up until the impact of the Security Guidance became clear to Mr Teoh on or about 11 or 12November 2018, he believed that TPG was likely to be able to roll-out most or all of its network plan. Following this, Mr Teoh asked Mr Hanly to investigate whether there was any alternative technical solution that would provide a 5G upgrade path while using TPG’s Huawei 4G network plan.In mid-January 2019, Mr Teoh asked Mr Hanly to contact alternative RAN vendors to attempt to find out whether there was a 5G-upgradeable small cell solution that could be installed on a pole and would meet TPG’s technical requirements. Mr Hanly contacted vendors including Nokia and Samsung.

241In the ASX announcement made by TPG on 29 January 2019, TPG said that it had ‘decided to cease the roll-out of its mobile network in Australia’. It said that it had been exploring available strategies to address the impact of the Security Guidance, but had ‘reached the conclusion that it does not make commercial sense to invest further shareholder funds … in a network that cannot be upgraded to 5G’.

242Mr Hanly and his team met with several vendors of network equipment (ie Nokia, Ericsson, Samsung and Airspan) between that time and 29 March 2019.

243On 29 March 2019, Mr Hanly presented to the TPG Board on the results of his investigations. As at that time, Mr Hanly had engaged primarily with Nokia, Ericsson and Samsung, and had discussed with those vendors whether they could meet TPG’s requirements. Mr Hanly’s assessment was that ‘no vendor could provide, or was indicating an intention to develop, a 5G AAU that could be installed on a utility pole alongside 4G equipment. Accordingly, none could offer TPG an acceptable technical solution’. Other difficulties with a mobile network roll-out were raised before the Board. On that basis, the Board decided that it was ‘clear that building a mobile network was not a feasible option’. MrTeoh recommended that decision to the Board.

244Mr Banfield advised the TPG Board that the absence of a technical solution rendered consideration of the other risks and challenges of a roll-out‘somewhat irrelevant’, but he nonetheless listed the risks that TPG would face were it to roll-out. The risks that Mr Banfield identified were the following:

Spectrum constraints

•As set out in David Hanly’s presentation, the 30MHz of 3.5GHz spectrum that the Group would have on a standalone basis was insufficient to compete effectively with the 5G product offering already launched by Optus.

Community resistance to small cells

•The rollout of the Group’s small cell network in 2018 was hindered by a significant number of instances of community resistance to the installation of small cells in residential streets.

•This caused (i) unanticipated delays in the rollout of the network, (ii) gaps in network coverage and (iii) suburbs where council / political intervention has blocked the Group from proceeding with the installation of small cells altogether.

•A compelling feature of the original business case was timing, ie being at the forefront of 5G.

246I find that this was a final and determinative decision made by the TPG Board (and Mr Teoh) to stop the roll-out of its mobile network on the basis stated in the presentation to the Board.I also find that Mr Teoh and the TPG Board held the view that the building of a mobile network was not a feasible option. Of course, Board decisions can be (depending on the circumstances) rescinded. It may have been that if shortly after 29 March 2019, Mr Hanly came back to the Board with other relevant information, the Board and Mr Teoh may have been more amenable to reconsider their decision.

247I contrast the position in March 2019 with the present state of affairs. I observe that with the effluxion of time before Mr Teoh would even need to consider changing his mind (ie when the current merger proposal merger is off the table), and in view of the public position taken recently by Mr Teoh, the information now at his disposal as to the potential difficulties with a TPG mobile roll-out, and the position of Telstra and Optus in the marketplace with 5G, any reconsideration in favour of re-starting a roll-out is extremely unlikely.

248Despite the suggestion of the ACCC to the contrary, I should also indicate that I consider that TPG’s decision to cease rolling out a mobile network was genuine, and was not driven by the desire for the proposed merger.

249This was never directly put to Mr Teoh. Mr Naik rejected this contention. The initial decision announced to the market on 29 January 2019 was catalysed by the implications of the Security Guidance. This occurred some months after the announcement of the proposed merger on 30 August 2018 and some months prior to the ACCC’s decision to oppose the merger in May 2019.

250Mr Naik gave evidence that members of his team were redeployed in September 2018 in order for TPG to focus on delivering as many small cell sites as possible.The Project Pinnacle Weekly Report released on 18 December 2018 indicates that TPG rolled out an increasing number of small cell sites in the successive months from August 2018 to October 2018: from 79 sites per month to 149 sites per month. Mr Naik’s evidence was that the subsequent drop in the run rate in November 2018 to 104 sites per month was attributable to the rising community objections, for example in Kooyong.

251Mr Teoh’s evidence was that TPG continued to roll-out its network in this period using existing Huawei equipment that had been purchased.

252The ACCC referred to an email in support of the suggestion that the proposed merger was the real catalyst for the ceasing of the roll-out. Mr Naik was shown an email from one of his subordinates, Mr Heckenberg which stated:

I caught up with Dave Hanly and he has suggested that we stop all work on macrosites, as we are unsure if these will be required post-merger.

253I do not consider this email shows TPG ceased or slowed down its roll-out on account of the proposed merger. It was rational for TPG to redirect the focus of its roll-out towards assets that could be deployed by TPG as a standalone entity, as well as MergeCo due to the uncertainty arising.

254The cessation of rolling out a network also meant that particularly since May 2019, TPG sought to reduce staffing costs and headcount related to the mobile deployment.

255Messrs Teoh, Banfield and Naik gave evidence to this effect:

(4)Mr Naik’s evidence was that since the 29 January 2019 announcement, TPG has not renewed any contracts for staff responsible for the mobile deployment.

(5)Mr Teoh’s evidence was that in May 2019 he asked Mr Naik to look at cost reductions.

256However, I do observe that, after the Board determined on 29 March 2019 that ‘building a mobile network was not a feasible option’, Mr Hanly and his team continued to engage with alternative vendors. Amongst other things:

on 18 April 2019, in the course of ongoing contact between Nokia and TPG about technical solutions, Mr Hanly sent an email to a Nokia staff member saying ‘[l]ets keep up the momentum’, and noting that he wanted to ensure that TPG had ‘a good understanding of [Nokia’s] offerings’. On 10 July 2019, Mr Ye, who reported to Mr Hanly, requested a meeting with Nokia the following week ‘to go through: (a) latest Nokia RAN hardware and feature roadmap, (b) Potential solutions for TPG scenario’;

on 10 July 2019, Mr Ye told Samsung that TPG was ‘in the process of collecting 3.6 GHz 5G radio product information for [its] internal evaluation’;and

throughout that period, TPG was continuing to engage with Ericsson in relation to its 5G solutions.

257Nevertheless, I do not accept that the communications TPG had with the equipment vendors which had occurred after 29 March 2019, took place or were motivated because TPG remained interested in understanding the solutions that would be available in respect of a potential 5G network upgrade or because it was likely that, absent the merger, TPG would wish to enter the mobile market in the next five years. In addition to referring to these communications, the ACCC submitted that their submission to the contrary was reinforced by Mr Teoh’s acceptance that he has ‘believed for a very long time that the future of [TPG] is in mobile’, and that he ‘still believe[s] that’. As I have alluded to already, this comment must be read in context and was not directed to TPG’s future in Australia, or its positioning in the retail mobile market.

258As to Mr Hanly’s (and his team’s) continued discussions with equipment vendors after the Board’s decision of 29 March 2019, I do not consider that was indicative of a continuing willingness on TPG’s part to enter as an MNO. Mr Hanly had stated in his affidavit that he continued to talk to vendors after the end of March 2019 because ‘I did not receive any instruction from the Board to cease contact with equipment suppliers’. In cross-examination, Mr Teoh and Mr Hanly gave wholly consistent evidence that Mr Teoh had not instructed MrHanly to continue these discussions after March 2019. What Mr Hanly did was explicable. Mr Hanly acted in the usual course of his job, and in the express hope of the merger continuing. The vendors confirmed in cross-examination that their discussions with Mr Hanly had, at least in part, concerned the joint venture or MergeCo. Mr Wright explained that network managers have such discussions ‘to understand any technology they [vendors] may be bringing to market. So, indeed, I visited Huawei regularly in China’.

259As I have indicated, I do not consider there to be any inconsistency between Mr Teoh and MrHanly on this issue. Mr Hanly was just doing his job to learn of the latest infrastructure and product availability. Mr Teoh as Chairman had his own reasons, including to be better informed. His reference in his evidence to seeing whether ‘there’s a new solution’ must be read in the context of his letter to Mr Sims (to which I will come to), and these proceedings. In any event, no direct attack was made on the credibility of Mr Teoh or Mr Hanly. I see no objective reason not to treat their sworn testimony on this aspect as accurate and a true reflection of their position. Attaching weight to stray comments of a witness, out of context, cannot undermine the proper understanding of the substance of the evidence given by a witness. For Mr Teoh to still believe in the future of mobile is not to be taken as an acceptance that TPG will resurrect itself in that space: it was just an acceptance of an obvious point that he has believed and still believes the future of telecommunications is in mobile, which for him is not just limited to Australia or to his own participation in the Australian market.

260Then the ACCC relied on a letter dated 10 May 2019 sent from Mr Teoh to Mr Sims. I consider that this letter does not show that TPG was contemplating or even thinking of entering the mobile market. Its context is important. Mr Teoh and his officers (including Mr Hanly) had dealt for several months with the ACCC, in both voluntary meetings and compulsory examinations. Mr Teoh and TPG had just learned that the ACCC had opposed the merger. In addition, through public radio and press releases, Mr Teoh had learned, for the first time, that Mr Sims believed that ‘TPG…has the capability to resolve the technical and commercial challenges it is facing’ and that Huawei was not a ‘monopoly supplier’ of the equipment TPG required. The first suggestion could bear upon the Board’s decision of January 2019, which had been announced to the market. The second suggestion could bear upon the Board’s decision of March 2019. If Mr Sims was correct, Mr Teoh believed each could have been based on a false premise, and wanted further information from Mr Sims. Mr Teoh denied that the statement that information about a solution ‘may be of profound significance to the future of TPG’ reflected the possibility that he would change his mind.Mr Teoh gave evidence (which I accept) that his own mind was made up that no business case for a new mobile network could be supported. I do not regard the communication with Mr Sims as being a contra indicator to Mr Teoh’s view.

261I now consider the issue of the 5G technology. TPG has emphasised that the window of commercial opportunity for TPG to become an MNO has now passed, because TPG will have missed the period of increased customer contestability associated with being at the forefront of 5G technology.

262Mr Teoh’s evidence concerning the initial roll-outwas that ‘timing and speed to market was critical to TPG’s MNO Strategy’, and that ‘[o]nce TPG had investigated the Huawei solution and the easy 5G upgrade path’, he realised that ‘TPG could be one of the leaders in 5G’. Nonetheless, it seems clear that TPG would not in fact have had the product 5G to sell into the market for some time. I accept that from August 2016, TPG expected that 5G would be in operation by 2020,but TPG could not have actually introduced a 5G network by this time.

263In this regard, the ACCC relied upon the financial model prepared by Mr Banfield, based on the roll-out of a 4G mobile network. The ACCC relied upon the fact that the cost of a 5G upgrade was not included in any version of TPG’s financial model.However, Mr Banfield said that it was expected that the 5G upgrade would be funded through cash flow generated from TPG’s 4G mobile network. Consistently with the instructions provided to him by Mr Teoh, MrBanfield’s financial model assumed that the 4G network would begin to receive cash flow from January 2020. The ACCC contended that the earliest that TPG could have commenced a 5G network roll-out would likely have been 2021, and it likely could not have completed a 5G network roll-out before 2024.

264The important point made by the ACCC was that as at 10 April 2017, TPG was in fact going to enter the 5G market several years behind Telstra and Optus and nothing has now changed in that regard. Hence it was submitted that TPG has not, at any time, formed a plan as to when it would roll-out a 5G network: it seemed that 5G would become more significant when 5G is widely adopted and TPG sought to expand its capacity with 5G.

265I accept that TPG even up to and including January 2019 still had no definite plan as to when the roll-out of a 5G network would occur, and an actual roll-out would not have occurred until after that of Telstra and Optus. However, as I have said, TPG expected that 5G would be in operation by 2020. I will return in more detail to this aspect later.

266However, it is convenient to mention now that in coming to this conclusion I place very little reliance on the financial models referred to a number of times and in different contexts throughout these proceedings by all parties. Each model was based upon various assumptions, many subjective, and the result of each model could be varied (as was demonstrated by Counsel and witnesses) by slight variation in single projected assumptions.

267As will be seen later in these reasons, Mr Wright’s conclusions about the likely quality of TPG’s network could have some profound consequences for the financial models which TPG prepared to support its decision to launch a mobile network.In summary, Mr Wright has made clear that TPG’s network design would have been incapable of achieving the customer acquisition assumptions envisaged by models created at the time by TPG.

268As an example of the subjectivity of the financial models, TPG’s 10 April 2017 financial model was highly sensitive to changes in the customer acquisition rate. That model assumed that TPG would commence in January 2020 with a customer base of 300,000, and then grow by 60,000 customers every month until November 2026, when TPG assumed it would reach a market share of 15%.

269Care must be taken in adjusting parameters in a financial model spreadsheet and reaching conclusions of fact. For example, if the customer acquisition rate is modified to 45,000 customers per month, which was the rate used by TPG in all versions of the model before 10 April 2017,then TPG’s market share would peak at 11% market share:that change decreases the net present value (‘NPV’) of the model from $770 million to $23.9 million.

270Then the model is also highly sensitive to changes in the ARPU assumption. The TPG model assumed that TPG would have an ARPU of $15 per customer per month. If this assumption was reduced to $14, and the customer acquisition rate is changed to 45,000 customers per month, then the NPV of the model is ($169.5 million). Of course, if the customer acquisition rates or ARPU drop further, then the NPV becomes even more significantly negative.

271Another example of the subjectivity of models arose when Mr Teoh was cross-examined about the version of the model as at 7 April 2017, when the decision was made to proceed with a capital raising, and the final version as at 10 April 2017. Mr Teoh was taken to the ‘DCF’ tab in the 7 April 2017 version, which showed an NPV of ($288.48) million. MrTeoh said the discount rate was too high and should be around 8.5% to reflect TPG’s weighted average cost of capital (‘WACC’). If that change was made, then the NPV becomes around $15 million. TPG’s WACC was 8.3%. If that number was used as the discount rate, then the model would show a positive NPV of $30.2 million. The cross-examination by the ACCC on this topic and the approach of Mr Teoh was extensive, but in my view did not undermine Mr Teoh’s stated position. If the cross-examination was to simply demonstrate Mr Teoh’s fluid approach to decision-making and that Mr Teoh and TPG at that time were very enthusiastic to roll-out the mobile network, I accept that was the position as I have already indicated.

272Returning then to the 5G path. In addition to densifying its network with small cell sites, TPG understood early that it would need 5G in order to have sufficient network capacity. From as early as 26 August 2016, TPG considered that having 5G would be vital for any mobile network that it would roll-out in Australia. The minutes of its Board meeting that day state: ‘In the long-term, mobile will become very important. 5G will be in operation by 2020 and will be capable of threatening fixed business. It is vital therefore that we focus on investing in mobile infrastructure’.

273Also during the network design process, Mr Teoh came to understand that TPG’s network would need an upgrade path to 5G, because 5G would significantly increase network capacity. Mr Hanly gave evidence that Mr Teoh said to him around or shortly after April 2017 that ‘small cell sites were the way of the future because 5G technology envisages using higher spectrum frequencies, which require cell sites to be placed closer together due to inferior propagation of radio signals at those higher frequencies’.

274The upgrade path that Mr Teoh had in mind was that TPG would deploy centralised baseband units (‘cloud BBUs’) that could be upgraded to 5G with software by adding a ‘5G card’ to the BBU, and that TPG would install Massive MIMO 5G AAUs on the utility poles alongside the 4G equipment. This ultimately would include 16T16R AAUs with Massive MIMO technology, which would substantially increase TPG’s network capacity.

275The importance of 5G to maximising TPG’s network capacity was referred to in TPG’s 28 April 2017 Board minutes, which record: ‘Deploying small cells on poles would reduce the number of macro sites we need to deploy and could be more cost effective. Maximising use of small cells is also the right approach as it increases capacity and is the right platform for 5G’. Likewise, TPG’s Board minutes on 26 May 2017 record: ‘We are trying to adopt a small cell approach in the most densely populated areas for two reasons: a) this is 5G architecture – bringing service closer to customers; and b) it will increase the capacity we can provide’.

276As at August 2017, the 5G upgrade path was mentioned to TPG’s bankers. A draft business strategy update received from NAB on 11 August 2017 stated:

Upgrade path to 5G – a path to the Future.

An important component of TPG’s network planning has been an easy and cost-effective upgrade path to 5G once the technology becomes available Australia (expected to be in 2020). Whilst TPG would require additional spectrum to launch a 5G network, it is important to note that their radio equipment (small and macro cells) are readily upgradeable to 5G, with minimal configuration and cost required to enable 5G services.

277TPG’s 2017 Full Year Results presentation to the ASX on 19 September 2017, shortly before TPG selected Huawei as its RAN equipment vendor, stated:

A higher density of small cell sites will be used for the initial 4G LTE rollout and will also provide key infrastructure assets for the longer term 5G evolution.

278The necessity for a clear upgrade path is now more important in the light of Mr Wright’s analysis of TPG’s network design. Under Mr Wright’s analysis, TPG would have to be able to deploy a 5G small cell solution by 2023, otherwise it will run out of capacity. This is the premise of Mr Wright’s ‘5G Midpoint Network’. Mr Wright agreed that to deploy the 5G Midpoint Network, TPG would need to have a viable 5G small cell solution, an appropriate existing utility pole at each midpoint, planning approval and compliance with the electromagnetic energy (‘EME’) regulations. Mr Wright agreed with the following proposition about the commercial uncertainty facing TPG in deciding to deploy the 5G Midpoint Network:

Do you agree, Mr Wright, that relying on your alternative approach today, TPG would need to launch its network knowing it would run out of capacity in four years but without knowing if it has a viable means of addressing that problem?---If they couldn’t negotiate a contract at day one that guaranteed it, yes.

279This increases the need of having a viable 5G small cell solution that the TPG Board could be confident in backing now. If it did not, it would effectively be rolling out a network which it would know would run out of capacity in 2023.

280Mr Teoh gave evidence that although Huawei did not yet have Massive MIMO as at November 2017 when Huawei was selected, he knew that Huawei’s cloud BBU could be upgraded to 5G and that Massive MIMO could be attached to it. In that regard, he recalled attending a Huawei presentation in Shenzhen in September 2017 during which Huawei presented on 5G technology including Massive MIMO. I accept that enabling TPG to put 5G on a small cell with Massive MIMO was an important factor in Mr Teoh selecting Huawei. Mr Teoh thought that Huawei could supply this technology.

281Mr Teoh’s evidence as to why he chose Huawei should be accepted, and is consistent with TPG’s earlier contemporaneous documents. It was also consistent with TPG’s internal documents after it selected Huawei as its RAN equipment vendor. A November 2017 Board presentation stated ‘[t]echnology vendor selected: Huawei’ and ‘[n]etwork upgradeable to 5G based on site access, fibre and power’. Likewise, TPG’s half year results dated 20 March 2018 stated ‘[h]igh density of small cell sites and deployment of Cloud RAN will provide a platform for 5G services’. Further, although Mr Hanly agreed that Huawei had not told him that it could supply a 5G AAU with Massive MIMO as at November 2017, it was not put to him that a 5G upgrade path was unimportant.

282One other matter to mention. When TPG rolled out fibre to the poles for its 4G sites, it laid an extra fibre pair for 5G. Mr Teoh emailed Mr Naik on 2 November 2017 to remind him that ‘[Mr Hanly] and I discussed yesterday to leave about 1m gap for future 5G antennas’. MrNaik’s update to the TPG Board in November 2017 recorded: ‘Network upgradeable to 5G based on site access, fibre and power’.

283Of course, it was clear that the entire network would not initially be ‘5G capable’. TPG’s business plan was to build a 4G network over three years which could be upgraded to 5G after that, once 5G was present in the market.

284The original idea was for TPG to roll-out a predominantly small cell site 4G network, complemented by a smaller number of macro sites, with provision for upgrading the network to 5G once Huawei 5G equipment became available.

285As I mentioned, on 23 August 2018, the Federal Government issued a media release concerning security guidance for 5G mobile networks in Australia. TPG did not initially appreciate that it would not be able to upgrade its network to 5G using Huawei RAN equipment, or operate an NSA network using Huawei 4G RAN equipment, as it had intended. That became apparent in November 2018 when Mr Hanly met with representatives of the Federal Government’s Critical Infrastructure Group.

286As I have also mentioned, in mid-January 2019, after Mr Hanly and his team had investigated possible solutions to the Security Guidance that retained Huawei 4G equipment, MrTeoh understood that theSecurity Guidance meant that TPG’s path to upgrading its planned 4G network using Huawei equipment to 5G was blocked. The effect of the Security Guidance was that TPG could not use any Huawei 4G or 5G RAN equipment as part of an NSA network. TPG could not deploy a 5G network (or a 5G-upgradeable 4G network) using Huawei equipment.

287This meant that TPG had three choices: to roll-out a 4G network using Huawei equipment that could never be upgraded to 5G; to abandon the roll-out; or to start a new roll-out from scratch using replacement equipment (if available).

288However, TPG commercially incurring the cost of rolling out Huawei 4G RAN equipment if it could not be upgraded to 5G would not have been a rational business decision. Nor would it have been a rational business decision to roll-out the 4G network with Huawei equipment and later roll-out a separate SA network using non-Huawei equipment, with the added cost and complexity of operating two networks. TPG dismissed this as an option in mid-January 2019. Mr Bromhead, whom the ACCC called from Ericsson, agreed it would be impractical to install an SA network in Australia at this stage.

289Accordingly, the Security Guidance deprived TPG of an upgrade path to 5G using Huawei equipment, which meant that as at 25 January 2019, TPG had ‘no other option’ but to cease rolling out its network.

290This need for 5G remains true, so accordingly, absent a technical solution for a 5G upgrade path, or the Security Guidance being reversed, TPG would not roll-out a mobile network. This is the reason the Court needs to consider whether there are other equipment vendors that can fill the void.

291However, before going to this topic, I make some further observations on the 5G path.

292The precise details of an upgrade path with Huawei to a Massive MIMO 5G solution were not finally resolved, but it was not only on a product roadmap; it was being developed by a well known vendor to TPG, and Huawei had indicated that it was going to be ready by late 2019. Obviously, this has not occurred as XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX.

293I note that a 16T16R AAU is Massive MIMO. The Massive MIMO offered by a 16T16R AAU is not as massive as the Massive MIMO offered by a 32T32R AAU or a 64T64R AAU. TPG had decided to focus on a 16T16R because it was the largest and most powerful unit apt to fit on a small cell site, such as a utility pole: with the spatial multiplexing and Massive MIMO, it is far superior to any traditional passive solution (I will return to the technical features of 16T16R AAUs later). Then, TPG expected that the Huawei 5G AAU was going to be capable of vertical beamforming. I will come to alternative vendors later, but TPG has consistently requested a 5G AAU from Nokia and Ericsson that was capable of both horizontal and vertical beamforming. It would be surprising if the unit custom designed for use in dense urban environments did not have this feature. Further, from the image of the Huawei 16T16R AAU, Professor Björnson concluded that the antenna elements were distributed both horizontally and vertically, and that it would likely be capable of both horizontal and vertical beamforming. Vertical beamforming brings a benefit where there are buildings that go up in height, such as in dense urban environments, because a device capable of vertical beamforming can send beams up and send beams down.

294There were going to be some volumetric challenges at certain utility pole sites even with the very small Huawei 5G AAU. There is an enormous variation in the volume of different poles. Nevertheless, the Huawei 5G AAU device was going to be capable of deployment on a substantial majority of poles. It was a problem that could have been managed if there weresome poles where the unit could not be deployed, depending on which antenna was used and whether an enclosure was used.

295It is important to also stress that TPG had a very good working relationship with Huawei, which it no longer has or will have in Australia. I accept that a good working relationship is vital between an operator and an equipment vendor. All relevant witnesses accepted that the relationship between a supplier and an operator is critical. I just mention now that in contrast with its decade-long dealings with Huawei, TPG has no existing relationship with Ericsson, and a limited one with Nokia, the potential new vendors of equipment.

296That TPG had a long-standing relationship with Huawei was attested to by the witnesses from Huawei called by TPG (which evidence I accept), namely Messrs Wang, Jiang and Chao.

300It is now important to consider potential vendors that TPG could go to in light of TPG’s current position, and the need for the 5G upgrade path.

301I provide this summary of my findings and conclusion on the issue of whether TPG lacks a business case because no other vendor can provide a 5G upgrade path. This provides an overview of the detailed submissions and evidence on this issue. It is important to understand the technical requirements, some of which I have mentioned previously, but need to be put in the context now of TPG’s future options.

302The design of TPG’s mobile network adopted a structure that was highly unusualrelative to the networks of other MNOs, which networks utilise traditional macro cell-based networks that are complemented by a smaller number of small cell sites. Small cell sites are base stations located on poles, street furniture or other lower structures, as opposed to macro cells which are typically located on the rooftop or sides of buildings, towers and other elevated structures. Small cell sites typically carry lighter, smaller and less high-powered equipment than macro cells, which lowers the capacity and coverage that can be provided through a small cell site as compared to a macro cell.

303In contrast to macro cell-based networks, TPG’s network design comprised a network predominantly made up of small cell sites using low band spectrum and high output power, complemented by a smaller number of macro cells, making it highly unusual and perhaps even unique. I will return to the matter of TPG’s unique system in more detail later.

304TPGadopted the unusual network design for two reasons: (1) it considered that the use of small cells was ‘5G architecture’ and (2) due to its limited spectrum holdings relative to other MNOs.

305The source of much contention in these proceedings concerned the design and architecture of TPG’s 5G RAN, and less so, its 4G RAN. TPG planned to deploy an initial 4G mobile network that would provide key infrastructure assets to accommodate an upgrade to an NSA network.

306TPG’s small cell 4G RAN network design involved the deployment of:

(1)two Huawei RRUs (one operating on 700 MHz spectrum, the other operating on 2.6GHz spectrum) with two passive antennas, a power supply unit, enclosure and cabling on each small cell site; and

(2)Huawei cloud BBUs housed in ‘BBU hotels’ at remote locations from the utility poles and that control and manage interference between a number of small cell sites.

307As to the 5G RAN, and as I have briefly mentioned, TPG’s strategy envisaged that it would:

(1)software-upgrade the Huawei RRUs operating on 700 MHz spectrum to support 5G technologies and communicate with 5G mobile devices using 700 MHz spectrum;

(2)deploy two Huawei Massive MIMO 5G AAUs operating on 3.6 GHz spectrum on the utility poles alongside the 4G equipment. This, in particular, would include 16T16R AAUs with Massive MIMO technology, capable of horizontal and vertical beamforming; and

(3)install ‘5G cards’ into the spare slots on the existing Huawei cloud BBUs to enable the BBUs to support 5G technologies and to communicate with the AAUs installed on utility poles.

Once deployed, this equipment would have allowed TPG to operate an NSA network.

308As I have mentioned, given TPG’s limited spectrum holdings, it was important not only that it could upgrade to a 5G service, but that it could achieve the increased capacity gain associated with Massive MIMO rather than a traditional passive solution. Compared to the use of a passive antenna, an AAU will generally have increased signal strength, and overall increased performance. If an AAU is set up correctly, it is more apt to maximise capacity and coverage than a passive antenna. For a small cell network, the only unit that is small enough to be installed on a utility pole with Massive MIMO technology capability is a 16T16R AAU.

309Massive MIMO allows for antenna arrays from 16T16R and upwards, which facilitates a potentially dramatic increase in spectral efficiency. While it is a potentially dramatic increase because the technology is still emerging,all of the network operators with 4G networks are augmenting them to have 5G capability.

310Massive MIMO seeks to separate several radio beams and then steer them towards users. This is sometimes referred to as ‘spatial multiplexing’. As the beams emitted by a Massive MIMO device are spatially separated, the same spectrum may be re-used by each beam. This has the effect of multiplying the spectral efficiency and thus the capacity of each site that employs Massive MIMO technology.

311TPG would only be able to achieve the capacity gains associated with Massive MIMO through the deployment of a suitable AAU.For this reason, TPG regarded a passive solution for 5G as unacceptable.

312Over the course of approximately two years, TPG developed its MNO strategy, planned its mobile network and began deployment. It completed its radio frequencynetwork design based on Huawei equipment.

313TPG spent approximately one year deploying its mobile network. For the RAN, TPG had installed Huawei 4G small cell equipment on utility poles at 924 sites nationally, of which approximately 400 sites are ‘live’, meaning that the small cell site equipment is installed, connected to power and fibre and ready to be integrated with the core network. If TPG had completed the roll-out of its planned network, it would have deployed approximately 4,863 small cell sites and 630 macro cells.

314On 9 May 2018, TPG announced that it expected to begin trials of its 4G mobile network and offer trial plans in particular metropolitan suburbs in the third or fourth quarter of 2018. However, TPG never launched the trials announced in May 2018. During 2018, there were delays in the roll-out and big gaps in TPG’s coverage, and in January 2019, TPG decided to cease its roll-out due to the Security Guidance.

315At the time TPG ceased the roll-out, it was at least several months behind schedule. Negotiating with utilities for access arrangements to utility poles had been slower than expected, and TPG had experienced unexpectedly high levels of community and political opposition tothe roll-out of small cell sites. TPG also made minimal progress on deploying macro cells.

316No sector of TPG’s mobile network was complete at the time it ceased the roll-out.

317As to the RAN equipment TPG had obtained from Huawei, at the time TPG ceased the roll-out, such equipment included (among other things), RRUs (with one operating on 700 MHz spectrum and another on 2.6 GHz spectrum), power units, passive antennas and a cloud RAN solution.

318At the time TPG had ceased its mobile network construction, Huawei had not provided TPG with a 16T16R AAU. Huawei was customising a 16T16R AAU capable of horizontal and vertical beamforming, and with a volume of 10 litres and a power output of 40 watts so that it was small enough to be suitable for installation on a utility pole alongside Huawei’s 4G RAN equipment.

319In early 2018, Huawei advised TPG that it could supply a Huawei 5G AAU with Massive MIMO that could be installed on the same utility pole containing Huawei 4G RAN equipment. By the time TPG ceased the roll-out of its network, a prototype Huawei 5G AAU device existed and Huawei had made a commitment to TPG that it would be ready by the fourth quarter of 2019, subject to any delays caused by additional customisation requirements.

320The precise details of the Huawei Massive MIMO 5G AAU were not finally resolved, but it was not only on a product roadmap and, as I have mentioned, was being developed by a RAN equipment provider with which TPG had a strong business relationship.

321It is common ground in this proceeding that TPG cannot deploy a 5G network (or a 5G-upgradeable 4G network) using Huawei equipment. This is because the 5G RAN equipment designed, manufactured and supplied by one RAN equipment vendor is proprietary and not currently designed to be interoperable, and is not currently interoperable at the radio base station level with the 5G technology of another vendor when used on the same sites in the same mobile network. The 5G RAN equipment designed, manufactured and supplied by one RAN equipment vendor is also not interoperable with the 4G network equipment of another vendor. For example, a 5G AAU of one vendor cannot interoperate with a 4G BBU of another vendor. Given the above and as a consequence of theSecurity Guidance, TPG is unable to use any Huawei 4G or 5G RAN equipment to build an NSA network. Were TPG to proceed with the roll-out of an NSA network, it would need to replace all Huawei RAN equipment with the equipment of another vendor (to the extent such equipment is available). The question of whether such equipment is available is a matter of contention between TPG and the ACCC.

322As to the availability of 4G RAN equipment, there does not appear to be a serious question as to whether a non-Huawei equipment vendor can provide TPG with the necessary equipment. Mr Hanly informed the TPG Board on 29 March 2019 that both Nokia and Ericsson may be able to provide suitable replacement 4G RRUs and BBUs for TPG’s 4G mobile network.

323As to the availability of a suitable technical solution to allow TPG to recommence rolling out a predominantly small cell 4G network with a 5G upgrade path, I accept TPG’s evidence that no alternative vendor currently has a suitable 5G upgrade path. TPG’s position primarily rests upon the absence of a suitable 5G AAU from an alternative vendor.

325There is also generally a lack of demand for 16T16R AAUs because MNOs with traditional macro cell network architecture are more focussed on achieving the even greater capacity gains achieved by using 32T32R or 64T64R AAUs, which due to their size are not suitable for deployment at small cell sites containing 4G RAN equipment. The lack of demand for a 16T16R, coupled with the absence of a close relationship between TPG and alternative vendors, could materially impact the timing of a 16T16R being made available to TPG for commercial use. Even with the current pace of 5G innovation, a 5G 16T16R AAU of similar dimensions, power and performance to the planned Huawei 16T16R AAU may not become available from alternative vendors in the next five years.

326I accept TPG’s evidence that the other potential 5G solutions the ACCC highlighted and which are offered by Ericsson and Nokia, are not suitable for TPG’s network design.

327Ericsson’s currently available solutions, namely, the ‘Ericsson 8823’ and ‘Ericsson 4422’ are passive solutions that are not capable of Massive MIMO and are therefore not suited to TPG’s network design, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX.

329Nevertheless, I do accept that TPG may not need to roll-out a 16T16R AAU now. I observe that 5G technology is likely to evolve rapidly and that given the current pace of 5G innovation, it is possible that a 16T16R AAU of similar specifications to the Huawei AAU will become available from other vendors. I can put it no higher than possible. However, in light of the circumstances set out above, I do not consider that it would be commercially sensible for TPG to proceed with a roll-out without greater certainty that its planned network design will be achievable within a reasonable period of time.

330Finally, I do not accept the ACCC’s submission that the level of certainty that TPG now says it requires as to a viable 5G solution is at odds with what TPG required during its initial network roll-out. This is because the landscape facing TPG today, the circumstances in which TPG is currently doing business, and its commitment to rolling out a mobile network is not in any way similar to that existing in April 2017, when TPG announced to the market its intention of doing so. In addition, the roll-out of a new network will require additional and unplanned financial investment and will necessarily be delayed (a matter to which I will come).

331Further, it is worth recalling this fact. At the time of trial, some months after TPG ceased its roll-out, and more than two years after TPG’s original decision to commence that roll-out, no other vendor has emerged with a solution that would allow TPG to upgrade to 5G with the 5G RAN equipment installed alongside 4G RAN equipment on the same utility pole.

332This is despite further engagement between TPG and potential equipment vendors in relation to equipment that might be used by TPG, by the joint venture with Vodafone or by MergeCo.

333Even if suitable replacement equipment became available (and this is not currently the case), it would be necessary to test whether such equipment provides similar coverage and capacity to the Huawei devices, not only to meet TPG’s requirements, but also to avoid potentially lengthy radio frequency redesign of the network.

334I do not accept that it is now rational to expect TPG to roll-out a 4G network without knowing whether there is a 5G upgrade path with a vendor it selects.

A ‘two pole solution’ is unacceptable

335One possibility that has been raised by equipment vendors and the ACCC is a ‘two pole solution’. This solution is designed to overcome the fact that 5G equipment and 4G equipment manufactured by vendors other than Huawei cannot be deployed on the same utility pole because it is too large. If there is no 4G equipment at a given pole, then there is some chance that even a very large 32T32R device might fit on an individual pole.

336However, TPG regards a ‘two pole solution’ as uncommercial. This is a business decision, which would be based on economic and technical matters.

337Intuitively, when it is understood that the ‘two pole solution’ requires the bulk of the deployment exercise to be duplicated – completion of the site acquisition process for the additional pole, delivery of fibre and power to the additional pole, new civil construction, a new pole licence agreement for the additional pole, structural drawings for the additional pole and new community consultation – it can be accepted such solution would involve a substantial increase in cost and increase in time.

338Mr Teoh considered that a two pole solution would add more complexity to any mobile roll-out, add significantly more opex, and give rise to significantly more community opposition, which would result in delays and make the roll-out more difficult.

339There has been no challenge to any of that evidence that it is commercially unrealistic to undertake a two pole solution.

TPG system is unique

340It is important to recall that TPG’s system is very different to others and is possibly unique when considering the challenges facing TPG with a future roll-out. This introduced and does present peculiar difficulties. Indeed, Professor Björnson, expressed the opinion that it was highly risky and that, if asked, he would have advised against using such a system.

341I have mentioned these already, but the features that made the proposed network unique were as follows:

(1)The use of small cells as the backbone of the network rather than as a means of adding capacity in areas of high demand.

(2)This extensive use of small cells led to another feature: in order to provide coverage and capacity in its network, TPG was deploying low band spectrum at its small cell sites.

(3)TPG had intended to use relatively high powered equipment more usually deployed at macro cell sites at its small cell sites.

342The 700MHz band was to be used in connection with TPG’s 4G service and its 5G services once the network had been upgraded. The advantage of using low band spectrum at a high power output is that it provides effective coverage given its superior propagation, but the disadvantage is that it creates problems with interference between adjacent cells.

343This interference needs to be managed using proprietary tools provided by equipment providers. Managing interference between radio cells is fundamental to the operation of a mobilenetwork. Interference management is challenging in both 4G and 5G. It is important to manage interference; it can result in reduced capacity, manifesting as a combination of call or transmission dropouts and lower datatransmission speeds.

344If radios are at a low elevation (as they were in TPG’s proposed network), it is important to manage the interference because it all turns into ‘radio pea soup’ if it all gets too close together.

345Both the closeness of the sites in TPG’s proposed network, and the strong propagation characteristics of low band radio signals cause significantly more interference than would have to be managed in a traditional macro network.

346In addition, the use of small cell sites presents deployment challenges because small cell sites mounted on utility poles have particularly stringent limitations in terms of volume, weight, power consumption, and heat dissipation, which limit the amount and power of the equipment that can be deployed on each pole. These limitations include the volumetric limits of the Telecommunications (Low-impact Facilities) Determination 2018 (Cth) and other requirements of State governments and utility pole owners.

347There is also the need to undertake laboratory simulation and field testing to determine the effectiveness of these features and, on the basis of that testing, to determine where small cell sites are to be located. This is referred to as the ‘radio frequency design’(‘RF design’) of the network. Differences in performance can result in the need to undertake RF re-design – for example, deploying RAN equipment on a different utility pole. This is an iterative process as moving the location of one pole will likely have knock-on effects on the location of other sites.

348This is particularly so in the case of small cell sites which are more sensitive, and which will change in performance depending on where they are located and the clutter and topography surrounding the site. A small cell network leads to greater coverage uncertainty in urban environments, and smallcell networks require more of a balance to be struck between form factor, antenna size and capacity.

349As I have said, TPG adopted this structure because it has limited spectrum holdings. As a result, TPG may only increase capacity in its network either by adding sites or increasing the spectral efficiency of its deployed equipment. If an MNO has more spectrum in absolute terms, it will deliver high speeds and greater capacity, although the extent of the improvement in speed and capacity will also depend on the efficiency of its equipment, the number of sites and the number of users making use of the network at a given time. If an MNO has limited spectrum holdings, single-user peak data rates will be poor, regardless of the number of users on the network, and single-user peak data rates are important to end-user experience.

350On the issue of spectrum (to which I will return in more detail), XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXX. Spectrum is a key strategic asset because it enables an MNO to increase its existing bandwidth, which translates to increased capacity and faster and more reliable speeds for customers. It is absolute spectrum holdings that matter because that is what limits what an MNO can offer. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

Mr Teoh

351It is convenient at this stage to outline Mr Teoh’s evidence and other evidence which supports Mr Teoh’s own position relevant to the future of TPG and the 5G path. The supporting evidence assists in the Court assessing objectively the likelihood of Mr Teoh and the TPG Board changing their minds to roll-out the mobile network.

352Mr Teoh’s evidence was that, before TPG could even consider rolling out a mobile network absent the merger, there must be a new and different business plan. He said that before he would recommend to the TPG Board that it should invest in rolling out a mobile network again, he would want to see a model that he had confidence in and would have to have a positive NPV. He also said it was important that TPG could fund the cost of the roll-out and had sufficient spectrum to be competitive with the significant amounts of spectrum held by Telstra and Optus. Mr Teoh said it would be important to understand the market opportunity and whether TPG could compete in the marketplace. He would want to make sure that that TPG would be able to compete in four or five years’ time, and would not be selling an obsolete product (ie 4G) when other MNOs are selling 5G.

353Unlike the ACCC, I do not view Mr Teoh’s approach to decision-making now as significantly different to when he decided in 2017 to roll-out a retail mobile network.

354As I have alluded to, it is wrong to assume that TPG’s assessment of the mobile strategy was contained exclusively in the financial model prepared by Mr Banfield. I have already made some observations on the utility of financial models. Mr Teoh did not rely for his decision-making on the financial model prepared by Mr Banfield. The financial model was a tool or a framework to assist Mr Teoh and the TPG Board to reach a commercial decision in April 2017. As Mr Foster said in his evidence concerning the model, ‘[s]o the business case, in other words, represents the reasons why TPG believed the entry as an MNO would be value enhancing to its shareholders. Now, that is separated from the financial model. The financial model is a tool which supports the business case’.

355There was a business case in 2017. In fact, TPG’s decision-making process last time seems to support the view that it is extremely unlikely TPG would reverse its January 2019 decision absent a proper business case (which now does not exist).

356It is to be recalled that on 12 April 2017, following its successful bid for 700MHz spectrum, TPG announced a capital raising and that it was intending to roll-out a mobile network with approximately 2,000 to 2,500 macro sites plus small cell sites across Australia. There was an analysis conducted by TPG before the decision was made, and it was supported by a business plan prepared within TPG.

357Mr Teoh began formulating a strategy for TPG becoming an MNO by mid-2016. He did that through discussions with key TPG executives such as Messrs Hanly, Naik, Levy, Pachos and Banfield. Much of it occurred through meetings or telephone discussions that were not recorded in written documents. I do not take the absence of written records to be indicative of any lack of rigour or analysis on TPG’s part.

358Using the inputs he obtained from speaking with his key executives, Mr Teoh worked with Mr Banfield in early 2017 to prepare a business model. Although the model’s primary purpose was to enable the Board to understand the debt and equity funding implications of acquiring the 700 MHz spectrum, Mr Teoh also said that it had to be presented to the Board to justify the purchase itself.

359Mr Teoh consistently maintained that the NPV consequences mattered to him and the Board. Further, notwithstanding that the NPV in the version of the model put to the Board on 7 April 2019 was negative, Mr Teoh rejected the notion that the NPV did not matter to him. The discount rate used in the model was 10%, but Mr Teoh knew at the time that if TPG’s WACC of approximately 8.5% were used, the NPV was neutral. I find that this was the basis Mr Teoh proceededin arriving at his decision.

360As at April 2017, Mr Teoh was confident in the business plan he had adopted and progressed. He said he thought that TPG had a ‘good business case’ for spending $1.261 billion on the 700 MHz spectrum. I accept this was his view.

361Further, as I have said, I do not assume that TPG – and its investors – would blindly replicate previous decisions, oblivious to changes in the market since, and the lessons of its attempt to roll-out a network.

362Returning to Mr Teoh’s evidence, he emphasised that, to be viable as an MNO, it was necessary for TPG to be able to compete with Optus and Telstra. He saw the market as moving to 5G, and he did not want to spend money on 4G,‘an obsolete product’ when ‘the market is a 5G market’. Mr Teoh saw the lack of 5G spectrum available to TPG as an impediment to it being able to compete with Optus and Telstra, particularly as consumer demand for capacity and speed increase over the next three to five years.

363Mr Teoh referred to Telstra’s recent announcement of a $15 per month plan for ‘endless’ data, with5GB of data at uncapped speeds and thereafter throttled to 1.5 Mbps (ie faster thanTPG).This plan also offers free access to Telstra’s 5G network until 30 June2020.Mr Teoh did not think that TPG could be competitive with an offer likethat. As he pointed out, TPG has ‘nothing today’and ‘even [if] we got it done in[a] few years’ time’,TPG’s network would ‘have a lot of coverage holes’withpoor or non-existent in-building coverage.Mr Teoh considered whether acustomer is going to buy this plan from Telstra or a plan from TPG when its initialprice had increased to $15, and stated ‘[w]e don’t have a businessplan’.Mr Teoh regarded the new Telstra product and what TPG planned as ‘thesame product’,but that TPG would not have the quality of service for a long timethat would make TPG’s product comparable to that of Telstra – ‘[w]e don’t havethat quality’.

364The presence of the Telstra product at $15 per month would have significance for Mr Teoh. If a consumer can receive a $15 ‘endless’ data-only product from Telstra, with its vastly superior network, no rational consumer would take such a product from TPG. It is doubtful whether TPG’s offer of 1GB per day would be sufficient to persuade 60,000 customers each month to subscribe to its network. Given the evidence of the value to consumers of coverage, which I referred to earlier, the presence of a product such as Telstra’s, coupled with the increased data available from all MNOs and MVNOs, raises at least doubt even as to the commercial viability of the original decision to roll-out a network.

365Mr Teoh also referred to Optus’ new 5G wireless broadband plans, which offerunlimited data for $70 per month at a guaranteed minimum speed of 50 megabytes persecond.He said that with ‘our [TPG’s] limited spectrum we can’t even offer that.… [H]ow can we compete? We can’t’.MrTeoh referred to this plan to emphasisethat to compete ‘even today is hard, let alone in three, four, five years’ time’.MrTeoh stressed that, regardless of the Security Guidance, TPG does not have enough3.6GHz spectrum to effectively compete with Telstra and Optus on 5G.MrTeohsaid that TPG’s position today is different from April 2017.TPG has adeteriorating balance sheet, its core business margin is coming down very rapidlyand its debt is very high. Mr Teoh said that the original plan was based onsignificant debt peaking in early 2020, with mobile revenue coming in from thattime to pay down the debt.

366It was put to Mr Teoh that the increase in competition in the market would nothave caused TPG to stop rolling out its network, and that without the Security Guidance,TPG would have continued its roll-out. Mr Teoh agreed with those propositions.However, Mr Teoh emphasised that the market is ‘getting very competitive …[e]xtremely competitive’.As MrTeoh stated, the increase in competition in themarket means that TPG would no longer have a viable business plan to supportsuch a decision.He said that ‘now we [have] lost valuable time and then the market [has] change[d]’.

367Mr Teoh gave evidence that from mid-2016, he considered that TPG’s entry as an MNO would need to be ‘disruptive’ to be successful. Relevant to forming that view was the fact that TPG’s market segment for its MVNO customers was price-sensitive and Mr Teoh’s perception that a high data inclusion was very important to attracting customers. He said that, at the time in 2017, TPG thought it could be disruptive by offering customers high data allowances at low monthly prices, such as $15.

368Mr Teoh discussed these views at the time with TPG’s Chief Operating Officer, Mr Levy, who has over 14 years’ experience in managing consumer product offerings in the retail mobile market. Mr Levy said that as at late 2016 or early 2017, he believed that TPG needed to offer a product that would ‘create a stir in the market’ if TPG were to have an effective mobile strategy. This meant offering mobile plans with ‘no lock-in’ contracts, lower prices, and higher data inclusions than people were used to. In part this was necessary to compensate for the fact that TPG’s network would have limitations, such as coverage gaps, potential inability to support certain Apple features, and would lack voice and text functionality.

369By May 2018, TPG considered that there was a strong opportunity to differentiate itself by offering ‘unlimited’ data plans to retail mobile customers which, at that time, TPG expected to result in less than 10GB of actual usage per customer per month. Accordingly, on 9 May 2018, TPG announced that it would be offering a $9.99 ‘unlimited’ mobile data plan that would be free for the first six months, with the first onegigabyte per day supplied at 4G speeds and thereafter capped at one megabit per second.

370Mr Teoh also considered that TPG needed 5G because he perceived that 5G would be the ‘leading product in the marketing and selling of mobile services’, and that offering a disruptive product with only 4G would be ‘very challenging’. In around July 2017, Mr Teoh formed the view that TPG could be ‘one of the earliest’ MNOs to have 5G. As I have indicated already, he formed this view because Huawei told TPG that it could supply it with a 4G cloud RAN solution that would be upgradeable to 5G.

371In the light of this information, Mr Teoh continued to hold the view that TPG might be one of the earliest 5G providers in the marketplace, possibly rolling out 5G in 2020. Mr Teoh agreed that TPG did not have any 5G spectrum at that time, but thought that it was possible TPG would win some 5G spectrum in the auction scheduled for the end of 2018. While TPG had not carried out any radio frequency design work for a 5G network, it did design its infrastructure to include additional fibre connections to its sites to facilitate 5G.

374At the point when mobile technology is transitioning between generations, there is increased contestability, market share shifts and an opportunity to win customers. The opportunity to be first in market perception will be lost as 5G becomes more widely available. This view was confirmed in the evidence of Vodafone’s CEO, Mr Berroeta, as well as representatives of MVNOs called as witnesses by the ACCC, Exetel and Macquarie Telecom.

375As just indicated, Telstra and Optus have started to offer and widely advertise 5G services and 5G devices. Telstra in particular, is educating consumers about 5G. Even if TPG were to reconsider now its decision to launch a mobile network and even if it found a technical solution, it would be well behind others in offering a 5G service to consumers.

376Mr Teoh is now confronted with the reality of the market today. This is relevant to whether MrTeoh will change his mind and restart a mobile roll-out, where one of his major missions to be first mover in 5G simply will not and cannot occur. Whatever Mr Teoh believed in 2017 as to being a first mover cannot be a rationally held belief now. The other matter to recall is that absent the merger, TPG has an asset (its spectrum) that is depreciating at aroundXXX XXXXXper month and generating no revenue. Any decision as to its future will have to be made very soon after the fate of the merger is known. This is an aspect which sways in the balance of the consideration Mr Teoh needs to consider, in light of his current views as expressed in this Court.

377I return to the issue of TPG entering the market again with a disruptive offer. Mr Teoh gave evidence that although he previously thought that TPG could make a disruptive offer, namely the $9.99 unlimited data plan announced in May 2018, this is no longer the case. Data demand is growing, and TPG’s competitors now offer far more data at lower price points.

378As I have mentioned, Mr Levy agreed that in May 2018, he had thought the $9.99 unlimited offer would attract significant consumer interest. Towards the end of 2018, Mr Levy had started to observe community concerns being raised about TPG’s small cell sites, and felt these concerns could adversely affect the attractiveness of TPG’s offer. Mr Levy also considered that these concerns were going to expand, not contract, particularly as he was approached by the Federal Treasurer and Communications Minister in relation to them. He said that TPG did not have a solution for these concerns. Although he thought the $9.99 offer still would be competitive as at December 2018, he also thought there was a group of affected people that would make the product less successful.

379Since December 2018, Mr Levy formed the view that TPG’s offer would no longer be disruptive, because the market has changed. He said he was ‘surprised by how fast the market was moving’, and that TPG now would need to offer data inclusions of 60 GB per month to create a stir. When asked what had caused him to form this view, he said the nature of the marketplace had changed since 2018, and it had become more aggressive.

380Mr Levy observed that whereas Telstra and Optus previously only offered SIMO plans on a contract, as of June 2019, Telstra had now moved to ‘no lock-in’ contracts. This was one of the reasons why Mr Levy considered that TPG would now need to offer 60 GB of data per month. Mr Levy also said that gaps in TPG’s coverage, along with delay in rolling out the network and no roaming agreement, meant that more data needed to be offered to counter these limitations.

381Mr Levy also said that Telstra and Optus were now offering 5G products when they were not doing so in May 2018. When it was suggested to him that Optus’ 5G fixed wireless product was not relevant, Mr Levy disagreed because both products are ‘internet, and you can use internet … how you like’. This view was supported by Exetel’s Mr Ward, who said he viewed TPG’s unlimited offer as more of a mobile broadband product than a mobile product.

382Clearly, the market dynamics are evolving. In TPG’s internal retail market competitor analysis, comparing the December 2018 report with the July 2019 report, the following market changes become apparent:

383As to whether the $9.99 unlimited data offer would currently be attractive to consumers, the ACCC called evidence from three MVNO representatives: Exetel’s Mr Ward, Macquarie Telecom’s Mr Davies and MyRepublic’s Mr Baker.

384Mr Ward expressed the view in his affidavit that TPG’s $9.99 unlimited offer announced in May 2018 would still represent ‘an extremely compelling offer to customers’, and drive down wholesale prices offered to Exetel by Optus or another MNO. Mr Ward’s view that TPG’s unlimited offer was ‘extremely compelling’, was qualified in oral evidence where he agreed TPG’s coverage would seriously diminish the attractiveness of the offer.

385Mr Davies expressed the view in his affidavit that TPG’s May 2018 unlimited offer, if offered today, would still be attractive even if TPG’s coverage was more limited than that of other MNOs. However, Mr Davies was not aware of the information that he would need, such as the extent of the coverage and quality of TPG’s proposed service, in order to evaluate whether TPG’s offer was attractive.

386Mr Baker expressed the view in his affidavit that if TPG’s $9.99 unlimited offer in May 2018 were offered now, other MNOs would respond by launching budget ‘fighting’ brands or offering lower prices. I do not accept this view as necessarily being accurate.

387Mr Baker has not operated in the retail mobile market in Australia, and his evidence was somewhat inconsistent, based upon historical information which he seemed unfamiliar with by personal experience or knowledge.

388I accept the evidence of Mr Teoh and Mr Levy that TPG could not make a disruptive offer today, and its inability to do so has been caused by recent market changes. Without the ability to make a disruptive offer, this is yet another aspect for concluding that TPG lacks a business plan for how it could win customers in the retail mobile market as an MNO.

389As I have stressed, significant time has elapsed since the previous roll-out. In the time that has elapsed since TPG ceased its roll-out, the market has changed and 5G has arrived.

390Whilst detailing significant aspects of Mr Teoh’s evidence, I mention that there were certain topics Mr Teoh was not cross-examined upon. I will briefly address those issues later. MrTeoh was not asked about network sharing, the roll-out strategy proposed by Mr Wright, or the possibility of a ‘thick MVNO’ mentioned in the joint venture agreement between TPG and Vodafone.

391As to the future market conditions, Mr Levy also gave evidence (which I accept) that the market has moved on and becomeincreasingly aggressive since TPG conceived of its initial offering.As I have mentioned, Mr Levy’sview is that TPG would now have to offer at least 60 GB of data to becompetitive.Mr Levy considered this increase to be necessary for the followingreasons:

(1)the shift from contract to no lock-in plans by Telstra and Optus;

(2)the gaps in coverage that TPG would have;

(3)competitors beginning to offer 5Gservices;and

(4)no roaming agreement.

Mr Levy stated that he couldenvisage a customer using TPG’s mobile offering as an alternative to fixed linebroadband.

392Mr Levy gave evidence about the market moving on and TPG’s window foreffectively rolling out the product shrinking. Mr Levy described the advantage thatTPG had prior to the Security Guidance as:

The advantage was that if we had brought a product to market in that timeframe as outlinedin the press release and it was a decent user experience and people started speaking about itlike we envisaged they would, then I believe from a timing perspective it would have beenavailable, timing wise, before things like 5G started to … take off.

393I now turn to the evidence of Mr Wright and the future possibilities for TPG. As I have indicated I also rely heavily on the evidence of Mr Wright. Whether all his conclusions are accepted or not, his evidence indicates the difficulties with a roll-out now which would impact on the future decision of TPG. In my view, Mr Wright’s analysis would indicate that there are technical difficulties that stand in the way of Mr Teoh changing his mind to roll-out a retail mobile network.

(1)the original TPG network design of April 2017 (the‘TPG Original Network’);

(2)the predominantly small cell network that was beingrolled out prior to being abandoned in January 2019 (the ‘TPG Small Cell Network’); and

(3)an alternative design of Mr Wright’s conception that utilises additional 5Gsmall cells on poles at midpoints between the 4G poles (the ‘5G Midpoint Network’).This alternative design that Mr Wright undertook was to model a hypothetical of what would happen if you added 5G small cells to the same poles as TPG already had its 4G cells based on the idea that Mr Hanly and Mr Teoh had in 2018 and early 2019, and included another model of a different hypothetical of what would happen if TPG continued with the type of 4G rollout that it had been undertaking with Huawei, but replaced it with a different vendor’s 4G equipment.

395Mr Wright’s conclusion about the TPG Original Network is that it would havebeen unlikely to have supported TPG’s announced objectives, including as to costand the number of customers that TPG assumed it would have (being 300,000customers at launch and then 60,000 customers added per month).This was because this network would have had insufficientcapacity to cope with the number of customers assumed to use it.

396On Mr Wright’s calculations, the capacity of the TPG Original Network wouldhave been exhausted before the end of the 2019 financial year, and the capacitydeficiency increased at an alarming rate thereafter.Even as TPG added morebase stations, capacity would have continued to have been exceeded.Adding5G to this network design would not have made any significant or materialimprovement to this outcome.Network capacity was exceeded by the time thatTPG acquired 2.24% of the market.The practical consequence of the capacityshortfall projected by Mr Wright was that sites within the network would beextremely congested, particularly during busy hours, and customers would seethe quality of their service slowing down and some applications, such as streamingvideo and music, would not work.

397Mr Wright agreed that the customerexperience on the TPG Original Network would have been so poor that it wouldstart to lose customers, and it would have been difficult for it to grow customer numbers.It would have had to take demand management steps, such as ceasing offering‘endless’ data plans, throttling speed, capping data and raising prices.

398Mr Wright also assessed the TPG Small Cell Network, which comprised 630 macrosites and 4,865 planned small cells.Mr Wright noted that around 60 of the macrosites were in Darwin and Tasmania, and said he was not sure of the purpose of thosesites ‘other than, perhaps, to allow people to get some service if they went to those locations’.

399Mr Wright’s conclusion was that the TPG Small Cell Network was better than the TPGOriginal Network in terms of capacity, but that it had some problems in terms ofdesign, including shortcomings in coverage around the sides of the antennas andthe very small footprint that TPG was planning to build the network within.TPG’s cell design of placing two antennas back-to-back would have created areasof low coverage to the sides of the antennas: there would begaps in coverage in each ‘circle’ around TPG’s small cell sites.

400Mr Wright projected that the TPG Small Cell Network would have exhausted itscapacity by June 2023 by a significant amount and that the capacity shortfall on thenetwork would have grown at a ‘fairly striking’ rate over the next four years.

401Mr Wright’s conclusion was that the same capacity problems that would haveexisted in the TPG Original Network would also have arisen with the TPG SmallCell Network, but at a later date. In Mr Wright’s view, the TPGSmall Cell Network would have been unable to meet TPG’s objective of being ableto add 60,000 customers per month.

402Mr Wright also assessed the coverage of the TPG Small Cell Network.In CBDareas, MrWright considered that this network would have satisfactory coverageand reasonable data rates at street level, but indoor coverage would be poorer orabsent.Coverage would drop as customers moved further into the building.Mr Wright explained that the small cells would be fixed between three and tenmetres from the ground,projecting a radio signal down to the streetandbecause small cells are so low the amount of signal going upwards is reduced.The impact of this is that indoor coverage between the third and fifth floors of aCBD building would be variable, and any coverage above that would be highlyvariable.Mr Wright explained that this variability in coverage was an outcomeof the network being predominantly comprised of small cells.MrWright considered that,when 5G was deployed on the TPG Small Cell Network, the coverage would begood outdoors at street level but weak indoors.

403Outside of CBD areas, Mr Wright considered that indoor and outdoor coveragewould be patchy and that there would be holes in coverage until the roll-out iscomplete, which would be exacerbated by areas where community or regulatoryreaction impacted the roll-out.Mr Wright said that the patchiness or ‘incompletecoverage continuity’ would affect the customer experience.This gave rise to arisk that calls would drop out and data rates would slow down indoors or above the thirdfloors of buildings in CBD areas and in other areas where the network waspatchy.

404Mr Wright said that he did not think that TPG’s product would appeal tocommercial or enterprise customers because it would not deliver the qualityprovided by a ‘tier 1 network’ such as the networks of Telstra, Optus and Vodafone.Mr Wright expected the service that would be provided by TPG’s Small CellNetwork would be ‘far inferior’ to the service provided by the three existingMNOs.He said that customers ‘who wanted continuity of service … wouldprobably pay more and go to a different service provider’.

405Mr Wright also developed his own design, the 5G Midpoint Network. Mr Wrightagreed that this design would largely have the same coverage and qualitylimitations as the TPG Small Cell Network. Mr Wright agreed that the coverageissues in CBD areas were ‘much the same’ between the 5G Midpoint Network andthe TPG Small Cell Network.He also agreed that the coverage issues in the areasoutside of CBD areas and in outer metropolitan areas were ‘largely’ the samebetween the 5G Midpoint Network and the TPG Small Cell Network.Mr Wrightanticipated that both networks would have poor levels of cover in the outermetropolitan areas compared to the existing MNOs, because the 566 outermetropolitan towers that TPG was planning to build and which are included inboth models would provide only ‘a thin network’.

406There were other matters Mr Wright raised, and there were matters of cost, but in the end the evidence of Mr Wright was informative as to the technical difficulties TPG would face now. It is just another factor to take into account in determining the likelihood of a changed position being taken by Mr Teoh.

Whether TPG could fund a second attempt at network roll-out

407The ACCC contended that neither Vodafone nor TPG demonstrated that TPG would not have the financial capacity to roll-out a 5G upgradeable mobile network. I conclude that it would be difficult for TPG to be able to fund the substantial capex necessary for such an endeavouron terms that would be acceptable to the existing shareholders of TPG, including Mr Teoh and WHSP.

408There are three interrelated factors:

(1)the effects of the failure of TPG’s first mobile roll-out on its credibility with debt and equity investors, particularly in the light of the evidence of Mr Wright and explanations of TPG’s senior managers of the problems that TPG was facing with its first roll-out;

(2)any business plan prepared by TPG, even if acceptable to the TPG Board, will be heavily scrutinised and likely considered to be unacceptable by debt and equity investors; and

(3)TPG’s financial position has deteriorated since April 2017, when it last raised capital, due to its increased debt and reduced cashflow.

409The first observation to make is that TPG’s first mobile roll-out was high risk and faced a probability of not being profitable. This risk was recognised by Mr Teoh, and was reflected in the substantial discount at which Macquarie Capital required the April 2017 capital raising to be pricedXXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XX. This discount was driven by Macquarie Capital’s expectation of the adverse reaction of investors to the price that TPG had paid for 700MHz and theXXXX XXXX XXXX XXXX XXXX XXXXX. This scepticism was reflected in equity analyst reports at the time of the April 2017 capital raising.

410This scepticism was shared by other market participants. Mr Sixt, a finance director with experience in rolling out mobile networks, including in Australia, gave the following evidence:

[F]rom the initial announcement … I simply didn’t understand how a company of TPG’s scale … could finance investment in a competitive fourth network, and I guess that all comes from … my bias as to where sources of financing come from, and how finite they are at any point in time. So I first of all did not personally believe that anything like a competitive network could be [rolled] out ... for $600 million, something very wrong with that picture given that nobody else has done it for less than several billion dollars. I hope we’re not that stupid. So … I didn’t believe … that it would get done for $600 million. And I also didn’t believe that TPG would have the capacity ultimately to fund a fully competitive … mobile network.

411The ACCC submitted that if the cost of TPG rolling out a 4G mobile network with an alternative vendor is not materially higher than the cost of rolling out its 4G network with Huawei, then it may be possible for TPG to recommence a roll-out without a further capital raising. In that regard, the ACCC contended that it should not be assumed that the cost to TPG of rolling out a network with an alternative vendor would be higher in circumstances where TPG has not yet created a financial model for the roll-out of a mobile network with an alternative vendor, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX XXXX.

412Mr Wright gave evidence estimating the costs that TPG would face in rolling out a mobile network. He considered first whether a ‘traditional’ macro cell network that would provide consistent coverage and service quality was a viable option. Mr Wright dismissed this as a realistic possibility, on the basis of his rough calculations that the costs of building such a network would exceed $3 billion.

413He then considered the TPG Small Cell Network and a variation of Mr Wright’s design, the 5G Midpoint Network. Mr Wright emphasised that both networks would be inferior to what he called the ‘Tier 1’ networks of Telstra, Optus and Vodafone, given it would have a more limited geographic coverage and variability of coverage in the area it covers (including limited or no coverage indoors, which is where 80% of mobile services are consumed).

414Mr Wright calculated the costs of building the 5G Midpoint Network would be approximately $1.08 billion over an eight year period. That calculation excludes opex and the costs of acquiring any further spectrum. Of that amount, Mr Wright calculated the cost of the 4G network as being $439,347,035 with the balance relating to the deployment of 5G capacity to ease capacity constraints. However, these calculations are highly dependent on their assumptions, and Mr Wright accepted that varying just one of his assumptions (the cost of deploying fibre to the midpoint cells) would increase the cost by up to $133,982,100.

415Mr Wright emphasised that he expresses no view on the business or investment implications of the costs he calculates, nor on whether it would constitute a commercially feasible option for TPG. Mr Wright’s model did not include any estimate of the revenue the networks would generate and did not include any allowance for opex. The 5G Midpoint Network that MrWright has designed has two and half times more sites (and poles), and has two and a half times for opexand power demands. The costs of building that network far exceeded TPG’s original budget for capex. Mr Wright agreed that the commercial reasonability of the model would be a question for Mr Teoh and the TPG Board.

416But even taking Mr Wright’s costs, and considering that the spectrum assets that TPG would be using in such a business are presently valued by TPG at $1.335 billion, any viable business model would require a return to be available on an investment of something in the order of $2.5 billion. This is in circumstances where Mr Wright acknowledged that the coverage and capacity of that network would be substantially inferior to the ‘Tier 1’ networks of the existing MNOs.

Funding through free cash flow

417The ACCC suggested that it may be possible for TPG to begin to roll-out a network without raising further debt or equity. That was put on the basis that TPG could use its existing cash flow to meet the costs. In the light of TPG’s recent financial performance, there is no real likelihood that the TPG Board would commit TPG to the capex requirements to build a mobile network from available cashflows.

418Since April 2017, TPG’s balance sheet has deteriorated. Earnings have decreased, principally due to the migration of TPG’s customer base from DSL to NBN products, which reduces the average margin per customer. TPG’s debt has increased. As at 31 July 2017, TPG had drawdown bank debt of $900 million. By 31 July 2019, TPG’s drawdown bank debt had risen to $1.425 billion.

419TPG reported its cash flow position for its 2019 financial year in its full year results presentation issued on 5 September 2019. The results show that its operating cash flow of $836.3 million was entirely consumed by tax of $128.6 million and capex for its core business (the ‘business as usual’ (‘BAU’)capex) of $198.7 million, mobile spectrum costs of $352.4 million, mobile roll-out costs of $86.1 million and capex for the Singapore mobile network roll-out of $80.1million. This has led to a decrease in TPG’s cash balance over the year, which stood at only $51.4 million as at 31 July 2019.

420On 5 September 2019, TPG stated to the market that it expected EBITDA for its 2020 financial year to drop to between $735 and $750 million. This was driven largely by a reduction of around $75 million as customers moved from DSL connections to the NBN, and $25 million as a result of the declining profitability of NBN customers. Mr Banfield projected that margin reduction, as customers transfer to the NBN (as he called them, ‘the NBN headwinds’), will reduce TPG’s profit by around $150 million over the next five years. Mr Banfield was not anticipating any positive cashflow from the Singapore business in the immediate term.

421As at 31 July 2019, TPG had debt facilities of $2.391 billion, of which (as I have already indicated) $1.425billion was drawn down. The maturity profile of these facilities as at 31 July 2019 was between 1.2 and 5.2 years, with a weighted average of 2.6 years. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XX XXXX XXXX XXXX XXXX XXXX.

422TPG reported to the market on 31 July 2019 that, once its spectrum liabilities are taken into account, its net debt as at 31 July 2019 was XXXXX XXXXXX, which gave it a leverage ratio of 2.4x. Its spectrum liabilities are the final instalment of XXXXX XXXXXXX for the 700MHz spectrum and XXXXX XXXXXXX for its share of the 3.6GHz spectrum purchased by the joint venture company, Mobile JV Pty Limited(‘Mobile JV’). If TPG did not apply any future cash flow to pay down debt, the spectrum payments would leave approximately XXX XXXXXXX of headroom under TPG’s facilities.

424The following table sets out the EBITDA projections that Mr Banfield provided to TPG’s auditors, KPMG, in connection with the impairment review conducted of TPG’s assets for the audit work for the year ended 31 July 2019 and the consensus of the forecasts of equity research analysts as at 27 August 2019:

425On Mr Banfield’s projections, TPG will XXXX XXXXEBITDA over the period 1 August 2019 to 31 July 2022, and then XXXX XXX XXXXX XX XXXXXX XXX XXXXXXX in each of the 2023 and 2024 financial years. The consensus of the analysts is that TPG’s EBTIDA will decline in the 2021 financial year and be flat in the 2022 financial year.

428TPG will also have to fund the capex of its existing businesses. In the impairment review provided to KPMG, Mr Banfield forecast that its consumer business will require around XXXXX XXXX XXXXXX and its corporate business will require around XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX each year for the next five years. In addition, its Singapore mobile business will also have capex requirements.

429Finally, TPG will need to have available funds for other corporate needs, including payment of dividends to its shareholders XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XX would not be desirable in commercial terms. In September 2017, TPG reduced its half yearly dividend from 7.5 cents per share to 2cents per share, and has maintained that level since. Given the emphasis WHSP places on cashflow and paying dividends to its own shareholders, this has been an ongoing concern to WHSP. Exhausting free cash flow to commit to a new project would diminish TPG’s ability to pay dividends.

430All the above information comes from the reports and statements made by TPG to the market and the evidence of Mr Banfield which I have accepted as giving an accurate account and reasonable predictions. In my view, it is not likely that TPG would or could fund a mobile network roll-out from free cash flow. It will require another source of finance.

Funding a roll-out with debt

431The ACCC also submitted that TPG would be able to obtain additional debt finance to fund a mobile network roll-out. I do not consider it is likely but in any event it would be difficult. This is because TPG’s existing businesses do not have the capacity to support a greater level of debt. Debt financiers are likely to perceive the risks associated with TPG attempting to build a mobile network as too great, particularly as the network would likely have the poor coverage and user experience that Mr Wright described.

432It is instructive to look at the recent debt refinancing carried out by TPG. On 30 September 2016, the TPG Board approved Mr Banfield taking steps to refinance TPG’s debt facilities, which were then $1.635 billion. From September to December 2016, Mr Banfield negotiated with TPG’s lead lenders (ANZ, NAB and Westpac). On 9 December 2016, TPG entered into a revised facility agreement.

433During the negotiations of that facility, Mr Banfield was seeking to secure as much financing flexibility as possible, for reasons including that TPG may seek to acquire the 700MHz spectrum. In late 2016, Mr Banfield had discussions with ANZ about the capacity for TPG to increase its debt facilities further if required. ANZ indicated that it would be comfortable with TPG increasing its facilities to a maximum leverage ratio of 3x TPG’s forecast annual EBITDA. While TPG’s debt covenant ratio was 3.25x, ANZ made clear that it expected some headroom between the leverage ratio and the debt covenant, to allow for the possibility of adverse movements in EBITDA. Based on these discussions, and the fact that TPG’s EBITDA was around $800 million at the time, Mr Banfield thought that TPG would be able to increase its debt facilities by a maximum of $750 million to a total facility limit of approximately $2.4 billion. An ‘accordion facility’ was included in the refinancing at this time that allowed TPG to borrow an additional $750 million without the lenders varying the facility agreement. This was not a commitment by the lenders to lend that amount.

434Following the April 2017 capital raising, Mr Banfield contacted TPG’s syndicate of lenders to discuss activating the ‘accordion facility’ and increasing TPG’s debt facilities by $750 million. The TPG Board agreed that, although the peak funding requirement would not arise for over two years, it would be prudent to secure the $750 million increase now so that TPG had ‘funding certainty’.

435Negotiations took place between TPG and the lenders from late April to September 2017. On 18 September 2017, TPG increased its debt facilities from $1.63 billion to $2.385 billion with 22 lenders, and increased its debt covenant ratio from 3.25x to 3.5x.

436Mr Banfield said it was much more difficult to secure this finance than had previously been the case. Westpac, which had a long relationship with TPG, expressed reservations about continuing their participation, and required a meeting with Mr Teoh. Mr Banfield had to meet with many potential lenders, including overseas lenders. The perception that he formed through his interactions with them was they considered the mobile network roll-out project to have greater risk than TPG’s existing business. The lead banks (ANZ, NAB and Westpac) scrutinised the business case and prepared forecasts of TPG’s likely future performance. TPG was required to present on its strategy to existing and potential lenders on numerous occasions in July and August 2017.

437During the negotiations in 2017, Mr Banfield was looking for ways in which to increase TPG’s debt covenant limit. In June 2017, ANZ stated that it would approve a temporary covenant increase to 3.75x, but this increase was not agreed to by the other lenders. Ultimately, the position reached was that TPG’s debt covenant was increased to 3.5x to accommodate the inclusion of unpaid spectrum payments into its financial indebtedness.

438It will be recalled that Mr Banfield expects that TPG’s debt in January 2020 will be around $1.8 billion, having regard to the spectrum payment which is due, and TPG plans to pay down debt from cashflow, which will give it headroom of around $600 million. XXXX XXXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX.If TPG wished to roll-out a new network it would be impossible to do so under its existing debt facility. It would be essential to extend Facility A1.

440TPG’s debt will have fallen to be around $1.8 billion in early 2020 only becauseTPG is no longer building a mobile network, and does not intend to build a new one. Hence, TPG can use spare operating cash to pay down debt. However, if the cash would instead be used to fund a new mobile network it would not be available to pay down TPG’s debt. Of course, if TPG could pay down its debt, then there would be no cash left in the 2020 financial year to fund a new network.

442Then, I see no reason to assume that there will be any refinancing or extension of Facility A1. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX. The future will be a matter for the TPG Board, but an emphasis on deleveraging would be rational.

444As I have said already, in looking at statements from a company, context is important. Caution should be exercised in respect of reliance upon the forecasts TPG provided to KPMG. It is better in considering TPG’s financial position, and how that position has changed, to look at TPG’s official, public results and forecasts. In September 2018, its result for the 2018 financial year was $841 million, and its guidance for the 2019 financial year was $800 to $820 million. A year later, in September 2019, its result for the 2019 financial year was $823 million and its guidance for the 2020 financial year is $735 to $750 million.

445The ACCC’s submissions draw a contrast between figures that Mr Banfield inserted into the financial model in June 2018 and the more recent forecasts he provided to KPMG. These forecasts were prepared for quite different purposes, namely, internal long-range forecasts prepared for the purposes of an impairment review. But in any event, in June 2018, TPG’s roll-out was underway and its debt facility was already in place. To draw any comparison for the purposes of assessing the likelihood of TPG’s entry, or its ability to negotiate a debt facility, one would need to go back to the figures in the model in April 2017. The 7 April model forecast $820 million BAU EBITDA for each year through to 2024, and the 10 April model forecast EBITDA, which included projected EBITDA for the Singapore business, starting at $813million, dipping below $800 million in the 2019 financial year, and thereafter going to $1092 million by 2024.

446TPG’s capacity to borrow to provide the necessary capital to fund a second attempt at a mobile network roll-out, will be at the very least difficult, and will in my view be unlikely. At the very least TPG’s difficulty in doing so would be one ofthe factors that would discourage the TPG Board to re-consider a future roll-out. It is also important to consider the interaction of cash and debt, and to keep in mind that TPG’s desire was to not exceed a leverage ratio of 3.0.

Whether a roll-out could be funded with equity

447When TPG previously conducted a capital raising in 2017 to support its network roll-out, Macquarie Capital, which undertook the capital raising for TPG, required both major shareholders (Mr Teoh and WHSP) to pre-commit to taking up their full pro-rata allocation. Based on their combined 60% shareholding, this meant that they together purchased $240million of the required amount. This capital raising also had to be conducted at a deep discount to the traded price (18.9% to theoretical ex-rights price and 20% to last traded price).

448With the effluxion of time, the failure of TPG’s original network roll-out, and the scrutiny that TPG’s original plan has received in these proceedings, it is unlikely that Macquarie Capital or any other bank could be prepared to underwrite a further capital raising without 100% commitment by Mr Teoh and WHSP.

450On that issue, Mr Teoh gave evidenceXXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXand that he does not believe that he could properly recommend a further capital raising to the TPG Board. That evidence was not challenged in cross-examination and I accept that evidence.

451An important consideration in relation to a future capital raising is the attitude of WHSP. MrBarlow’s evidence is important in considering whether TPG would be able to pursue a roll-out, particularly through an equity capital raising. He confirmed that TPG represents a significant proportion of WHSP’s asset portfolio. WHSP seeks to maintain a diverse investment portfolio, avoid high levels of debt and hold investments for the long term. Mr Barlow recommended to the Board of WHSP that it take up its full entitlement in the April 2017 capital raising. He did so because of Mr Teoh’s belief in the mobile strategy, the potential of that strategy to provide an avenue for growth and to extract further value from TPG’s fibre backhaul assets, and because, if WHSP did not participate, it would be diluted. Mr Barlow understood that one of the advantages of a 4G network roll-out was that it would give TPG an advantage in rolling out 5G, and allow TPG to be an early mover into 5G.

452Mr Barlow was asked about WHSP’s position if the merger does not proceed. He agreed that it would be preferable for TPG to find an avenue for growth. If Mr Teoh recommended a resumed mobile strategy, Mr Barlow said that WHSP would certainly take that recommendation into account, and his recommendation would be enhanced if Mr Teoh was participating in a potential capital raising himself. Mr Barlow considered that there would need to be a credible business case, which adequately addressed the significant challenges including technological challenges, the risks caused by any delays or cost increases, and how to address the incumbency advantages and offer a product that would obtain sufficient market share. Mr Barlow said that WHSP ‘would want to … interrogate the plan a little bit more so than we did in 2017’ and understand exactly what TPG’s business plan was going to be.

453Mr Barlow explained that WHSP analysed the April 2017 capital raising, knowing at the time that the raising had to take place because TPG had already committed to purchase the 700MHz spectrum and the raising was going to occur at ‘a very low price, a very high discount’. WHSP was conscious that, if it did not participate then the discount would be even greater and the share price would be even lower, and that would dilute the value of WHSP’s residual holding. This made ‘the importance of understanding the ins and outs of the business case … less important’ because WHSP knew it would be in a worse position if it did not participate. Mr Barlow considered that had he had more information about the details of TPG’s roll-out plans and its proposed coverage, he would have perceived a greater risk in it becoming profitable. WHSP paid for its commitment under the capital raising with bridging finance which was repaid in November 2017 through the sale of another WHSP investment.

454Mr Barlow also explained that the circumstances of the 2017 raising provided little opportunity for WHSP to scrutinise or object to the capital raising, as TPG had already committed to purchase the spectrum, and so the capital raising was likely to go ahead with or without WHSP. As Mr Barlow put it, ‘we felt we were a bit over a barrel [and] we had to participate’. MrBarlow said he hoped that any future hypothetical capital raising would be conducted under different circumstances, with an opportunity to opt out and lobby the Board and Mr Teoh to change directions if WHSP ‘didn’t think [the proposal] stacked up, or … we didn’t have the ability to follow or rights and we thought that it was going to be detrimental to our residual shareholding’.

455He contrasted this to how he would approach a hypothetical future capital raising. Mr Barlow gave evidence about how he would approach any future capital raising, on which he was not challenged. Mr Barlow said that if TPG was proposing new capex which WHSP did not think stacked up and would be detrimental to its residual shareholding, WHSP ‘would be in a position to lobby for it not to go ahead’.

456It was put to Mr Barlow that, if Mr Teoh consulted with WHSP about a future business plan to become an MNO, and WHSP agreed with it, it would support the capital raising because it would not want to be diluted. Mr Barlow said it would not be as simple as agreeing to the proposed business plan. It would involve critically analysing and considering how WHSP is going to fund that and that would be a function of the size of the capital raising. WHSP may not have the capital to contribute. It does not have any significant cash. While it could bridge with debt, in the end it would have to sell one of its existing assets to fund the participation. MrBarlow explained that WHSP would undertake an analysis of whether the upside from investing in the TPG hypothetical case exceeds the returns from existing investments, having regard to the tax consequences of selling existing assets which mostly have a very low costs base. WHSP would have to be satisfied that TPG’s new business plan is not only robust but exceeds the return WHSP can obtain from its existing portfolio, considering the tax payable if assets are sold. Mr Barlow said that if the future capital raise was at a price that was so low that it was going to significantly dilute existing shareholders, then WHSP would actively lobby for the capital raising not to go ahead.

457If Mr Teoh and WHSP refused to participate in a capital raising for a risky project in which MrTeoh had no confidence, that is likely to be the end of the matter. The discount that would be required for a raising in which Mr Teoh and WHSP did not participate would be on such unfavourable terms that shareholders would be against it and the Board would be unwilling to approve it in those circumstances. Mr Barlow gave evidence that WHSP would actively lobby against a capital raising in such circumstances even if the raising was in support of a business plan that it considered sensible.

458Further, even if WHSP did agree to participate, the likelihood is that any future capital raising would be likely to require a similar, if not greater, discount than the last capital raising. The discount on the last occasion reflected Macquarie’s assessment of the discount required to persuade shareholders to participate in the raising. It was calculated by reference to the perceived risk involved in the transaction. Any future raising would be likely to be seen as more risky than the original transaction.

459This means that any capital raising would be on terms damaging to TPG’s shareholders because it would dilute the value of their shares. Mr Teoh would be ‘very reluctant’ to recommend such a capital raising to TPG’s Board.

460TPG’s ability to access the equity capital markets was also the subject of both lay evidence from Mr Banfield and expert evidence from Professor Gray and Mr Neal.

461Mr Banfield did not accept that the conditions for any future capital raising would be more favourable than the conditions at the time of the April 2017 capital raising. He said that the effect of the high price paid for 700MHz spectrum on the April 2017 capital raising would apply equally to any future capital raising for a future mobile project, because if the raising was occurring then TPG would not be selling its very valuable assets, the spectrum, and so the same concerns would apply.

462As to the evidence of Professor Gray, his expertise is in relation to how the debt and equity investors who would ultimately be asked to fund the project would assess risk and decide whether to invest. Professor Gray provided evidence about how debt and equity investors are likely to react to TPG’s attempting to raise further debt and equity investment. As he explained in his report his teaching, research and consulting experience extends to issues relating to investment decision-making and the factors that investors consider when constructing investment portfolios.

463Professor Gray assessed the factual substratum that would inform the decision by investors as to whether to support the capital raising. He concluded that it was highly unlikely that a capital raising could be executed, even with the participation of Mr Teoh and WHSP, because any future raising would likely have to be at a greater discount than the 20% discount required in April 2017 because of the effect on market perception of TPG created by the failure of its first roll-out and the deterioration in its financial performance since that time. I accept this assessment. Professor Gray was not challenged on his conclusions that debt financing would not be available, or that there would be no free cash flow to finance the project. The approach taken by Professor Gray in analysing Bloomberg data about the discounts on subsequent capital raisings (which approach was criticised by the ACCC) does not affect his analysis as to prospects of success of a future TPG capital raising.

464Then, in my view, the prospect of an underwriter or investors being willing to invest their capital if Mr Teoh or WHSP did not is remote.

465XXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. The explanation provided by Professor Gray was a reflection of the impact that the decision of company ‘insiders’ not to participate in the capital raising would have on other investors. It is obvious that investors would be sceptical of any capital raising if Mr Teoh and WHSP, with their superior knowledge of TPG’s business and prospects, were not willing to put their own money into any capital raising.

466Mr Neal took a different view, which I do not accept. He expressed a view that a $400 million capital raising by TPG would be capable of being underwritten even without the financial participation of Mr Teoh or WHSP.

467However, Mr Neal came to that view entirely as a consequence of a series of underlying material assumptions. Mr Neal did not offer any opinion on the reasonableness or achievability of this assumption: Mr Neal was not a telecommunications expert. The assumptions made by Mr Neal include, for example, that TPG is able to devise a model with a positive NPV that is strategically sound and soundly costed, addresses all material issues identified by Mr Teoh and Mr Banfield in their evidence in these proceedings,and Mr Teoh being able to at least explain why he would not be participating in the equity raising.

468Mr Neal had not assessed what issues might be relevant to equity analysts, or which TPG might have to address before it could carry out a capital raising. He agreed that if TPG could not address those concerns then it would have an adverse impact on TPG’s capacity to raise equity. The clear picture that has emerged from the evidence is of the manifold difficulties that would need to be disclosed to the market.

469Mr Neal also expressed the opinion that the discount applicable to a 2020 capital raising would be lower than 2017. I find this not to be cogent. TPG would be raising more than three times as much as it did in 2017 from shareholders other than Mr Teoh and WHSP, there has been a downturn in TPG’s financial position, and the project has failed once.

470Finally, Mr Neal had not assessed the discount that an underwriter would apply to any hypothetical future capital raising by TPG using the methodology that an underwriter would in fact apply in the telecommunications environment. This may be understandable as Mr Neal was not a telecommunications expert.

TPG will monetise its spectrum

471The existing fact is that TPG has no business case for rolling out a mobile network, and has indicated it will not do so absent the merger. It is most likely that TPG will move on and monetise its spectrum assets, either by sale or sub-lease: it is costing TPGXXX XXXXXXin depreciation a month to hold its spectrum,XXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX.

472TPG will need to move relatively quickly as its spectrum is depreciating at such a cost, when TPG currently sees no prospect that a business case for a mobile network will emerge. Monetising the spectrum would not be irrational or unlikely compared with holding onto it for a mobile network.

473TPG has already committed itself to the path of seeking to monetise its mobile spectrum and network assets in the event the merger does not proceed. I see no basis to conclude that it would alter that course if the merger could not proceed. While TPG has several assets that give it some advantages in rolling out a mobile network, such as a fibre network and a call centre, it does not follow that rolling out a mobile network is its best or only strategy.

474Mr Teoh’s view is that the best strategy for TPG to pursue if the merger cannot proceed would be to reduce debt, and to that end the TPG Board directed him in March 2019 to look at ways to monetise TPG spectrum assets. XXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXX XXX.

476Telstra would be another potential purchaser of TPG’s spectrum. Telstra was not permitted to participate in the 2017 auction for the 700MHz spectrum as a result of government allocation limits. However, there are no equivalent rules that would necessarily prevent Telstra from acquiring the 700MHz spectrum from TPG as a commercial arrangement. If the merger does not proceed, there is a very real possibility that Telstra’s dominance would be further entrenched through the acquisition of this spectrum.

477Whilst on the subject of the sale of TPG’s spectrum, I make these observations.

483If the merger does not proceed and TPG does not enter, there is a real prospect that the market for retail mobile services will be reduced to ‘2.5 operators’ as Mr Foster suggests.

484I also mention that Mr Foster in his report showed that there was an economic rationale to sell or lease TPG’s existing spectrum holdings and network assets. Whatever criticisms were or could be made of Mr Foster (for example on his customer ‘churn numbers’), I do not consider this alters the position that the decision of TPG to monetise its spectrum in March 2019 was economically rational.

485As to the debate about Mr Foster’s analysis on ‘churn’, I do not consider it is of any importance to the ultimate analyses to be made.It wasnot suggested to Mr Foster, that his churn rate assumption was too high, not conservative or not supported by the evidence. As Mr Foster explained, he adopted the most conservative assumption based on historical average churns rates: ‘choose the lowest [churn rate] that one observes today in Australia and use that number’. His model adopted a churn figure of 1.5%, which is lower than Vodafone’s churn rate (3.4%) and TPG’s MVNO churn rate (2.4%). Further, it should be recalled that churn numbers are an empirical assumption that a board member, major shareholder, debt financier or capital raising underwriter will need to evaluate based on their own knowledge and experience.

486Mr Foster clearly explained that the import of modelling is to provide a framework or set of parameters to inform commercial decision making, not to supplant it:

[O]ne really should avoid fixating on a single spreadsheet and a single model as though it were sort of a transcendental representation of the truth. I think modelling is an exercise and one needs to take the results of all these models in the round and what they all say. And, of course, the results will change when very important parameters change … [I]t’s right that the model produced very different answers in response to those very important assumptions.

But what I did want to say and add is one thing, which goes to this question of … was there a sort of revelation that took place in the mind of TPG between 6 April and 10 April simply because the NPV of the model goes from minus 300 to plus 700? And this, I think, comes back to the distinction between a business case and a financial model and a spreadsheet.

… It’s perfectly possible for me as a businessman hypothetically to look at that spreadsheet and say that loss of minus 30 million gives me huge amounts of confidence in the profitability of my business case, because I might look at that financial model and say, “I know that that model has been parameterised with assumptions that are very conservative” …

Other matters affecting the likelihood of TPG rolling out a mobile network

The ability of TPG to obtain a roaming agreement on commercial terms

487I do not regard a roaming agreement as being critical to allow TPG to offer a mobile service with good user experience that fills in coverage of the network beyond TPG’s own footprint. The evidence led by Vodafone and TPG strongly suggests that a roaming agreement has not been critical to TPG’s entry as an MNO to date.

488However, Mr Teoh said that ‘[a] roaming agreement on commercial terms would assist TPG to enter as an MNO’, and Mr Levy said that a roaming agreement ‘would be an important part of making TPG’s ultimate mobile offering attractive to customers’. (emphasis added)

492The unlikely prospect of TPG obtaining a roaming agreement is also confirmed by the affidavit evidence of Mr Pachos, XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXXXin 2017 and 2018. He was not cross-examined. The thrust of Mr Pachos’ evidence was as follows:

493The fact that the prospect of obtaining a roaming agreement on commercial terms is unlikely further tells against the commercial reality of any new network roll-out.

494If no roaming agreement on viable commercial terms would likely be provided to TPG this would mean that the TPG Board, in considering whether to recommence a roll-out, could not assume that the technical and quality issues that confronted the first roll-out would be addressed through such an agreement.

495There is a body of evidence that establishes that if TPG were to roll-out a network it would need a roaming agreement and there may be difficulties in obtaining one:

(2)Mr Teoh gave evidence that if TPG were to roll-out a network, it is likely that initially, ‘there would be blackspots (ie areas without coverage) in that network, such as areas where TPG had not yet deployed RAN equipment and in tunnels’. While TPG’s network coverage would improve over time, Mr Teoh gave evidence that it ‘would take years to address blackspots’ and that a ‘roaming agreement would also expand coverage beyond TPG’s planned roll-out area’. In cross-examination, Mr Teoh explained the requirement for a roaming agreement in the following terms:

You were after a roaming agreement with infill coverage?---Of course. Otherwise we would have a very bad service. The infill, like when you go to the car park or you go to inside the lift where TPG do not have coverage, and we need this type of roaming is very important.

496That same analysis applies to any network that might be rolled out in the counterfactual, as explained by Mr Wright. In his first report, Mr Wright identifies that because the network he models only provides population coverage up to 60%, TPG may seek to negotiate a roaming agreement to get it to 80% ‘if such a deal could be commercially negotiated’.

(3)there are no mobile roaming agreements in Australia that provide ‘infill coverage’.

502Mr Berroeta gave evidence in relation to the significant technical difficulties involved with an infill agreement, in particular in relation to providing ‘seamless handover’, as a customer moves from one network to another. If Vodafone was to provide seamless handover to TPG, their core networks would need to be fully integrated, a complex process requiring a major financial investment by the parties. Mr Berroeta’s evidence was that he would be unwilling to direct Vodafone’s capex budget towards offering infill coverage to another MNO.

503Without seamless handover, customers encounter poor service as calls drop out when switching from one network to another. As Mr Berroeta explained, in the context of Vodafone’s existing roaming agreement with Optus:

[W]hen a customer of Vodafone enters an Optus roaming area, if that customer is covering a conversation on the phone, their conversation will drop because Vodafone is not capable of transferring that call like to Optus. That is a seamless handover. This is not a big issue when it is incremental coverage. It is a much bigger issue that it is an infill agreement that the customer is constantly going from one network to another.

[W]e would have a very bad service. The infill, like when you go to the car park or you go to inside the lift where TPG do not have coverage, and we need this type of roaming is very important. And what they propose is not that. They propose is outside 60 per cent. They … wanted us to cover 60 per cent before they give us the other area, and what they propose is take or pay, which is very expensive and risky.

505Mr Wright’s evidence was that an infill roaming agreement is unlikely to be achieved:

TPG may attempt to acquire a roaming deal beyond this 60% population coverage area to satisfy customer expectations, potentially up to 80% of the population as TPG originally planned to service if a deal could be commercially negotiated. Such a deal would likely entail geographic roaming only outside of the TPG 60% population footprint and not within because in-coverage roaming agreements are not normally adopted due to the complexity of network signalling, high likelihood of call drops and overhead of ongoing network optimisation that might [be] required for all of the overlapping sites and cells in the network.

506Therefore, I accept that if TPG was to roll-out a network it would be very important for it to enter a roaming agreement, and the form of roaming agreement TPG would need most would be an infill roaming agreement. Then TPG would have no real prospect of securing an infill roaming agreement, although TPG may be able to secure a donut style roaming agreement to extend its geographic reach (like the roaming agreement between Vodafone and Optus). However, this form of agreement would not resolve TPG’s coverage problems, andXXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

507If TPG were to roll-out a networkwithout an infill roaming agreement, TPG would go to market with a lower quality mobile service, relative to the network coverage provided by Telstra and Optus, because its network would not provide any coverage beyond TPG’s planned network deployment.There would also be many more blackspots or gaps in TPG’s network than it originally envisaged, due to areas where community or Council concerns would prevent the deployment of small cell sites.

510Mr Teoh rejected the thick MVNO proposal when it was made in August 2017, but the possibility of a future thick MVNO arrangement was considered again a year later in August 2018 when Vodafone and TPG formed a joint venture for purposes of ensuring that they were entitled to bid in 3.6 GHz spectrum auction. The recitals to that joint venture agreement (the ‘Mobile JVA’) record that Vodafone had previously put to TPG a ‘thick’ MVNO proposal which TPG did not wish to progress at that time. One of the objectives of the joint venture is ‘to discuss and pursue options for undertaking more efficient forms of spectrum and mobile/wireless infrastructure sharing’.

511A distinction must be drawn, however, between the thick MVNO concept and the concept of ‘network sharing’ as between MNOs. The evidence of both Mr Berroeta and Mr Badrinath was that a ‘thick’ MVNO arrangement is simply a variation on the conventional type of wholesale agreement that would be reached between an MNO and an MVNO and is fundamentally different to a network sharing agreement, which is an arrangement between MNOs who agree to jointly share, dimension and manage particular parts of their radio networks.

512The thick MVNO arrangement proposed to TPG in August 2017 is thus to be contrasted to where TPG rolls out its own mobile network, and has no advantage to offer TPG.

There would be difficulties and delay involved in the network build

513The difficulties of timing, namely that TPG now would not be one of first movers in 5G, and that the market has changed such that TPG’s originally planned $9.99 unlimited offer would no longer be disruptive, are compounded by the fact that any network roll-out would be years from completion.

514Mr Naikestimated how long it would take TPG to roll-out its network now using Huawei equipment. If theSecurity Guidance were reversed, and TPG resumed its network roll-out on 1 September 2019, Mr Naik estimated that even in a ‘best case’ scenario, it could not complete that roll-out before July 2022.

515The Court has to take a realistic view of the position TPG now confronts.

516Since ceasing its roll-out on 25 January 2019, TPG has not renewed any contracts for staff responsible for the mobile deployment. Accordingly, any decision to begin a new roll-out would require a lead time of some months.

517Huawei’s A + 2P product would be the equipment used for a 5G upgrade, and would take at least six months to be available for commercial sale. Then, if TPG used this solution, as opposed to keeping its passive antennas separate from its 5G AAUs on the pole, more time would be needed.

518If TPG were to use an alternative vendor’s equipment, the delay would be longer. This is because TPG would need to remove Huawei equipment, re-start its RAN equipment deployment process from scratch, and conduct lab tests and field tests on the vendor’s equipment before it could be deployed, which would take approximately six months in total. If a radio frequency re-design were required, because the equipment had different coverage or capacity, or interference management capabilities, the roll-out would take substantially longer.

519It is clear from the evidence that TPG encountered significant problems during its small cell roll-out arising from community opposition, which was supported by local councils and political representatives. Before considering whether to recommence any network roll-out the TPG Board would have to consider how it would manage these issues and how delays and difficulties arising from community opposition would impact the viability of the business case.

520Mr Levy was of the view that community concerns around TPG’s use of small cells was a problem and likely to become increasingly problematic as the network expanded. Mr Wright agreed that over the next 18 months, there will be heightened community opposition to small cells, and that this will slow down the rate of roll-out in the short to medium term.

521With respect to consumer interest in TPG’s mobile network offering, Mr Levy began to feel less positive about the product due to community concerns in relation to TPG’s small cell network. Mr Levy gave an example of being contacted by the Commonwealth Treasurer, the Hon Josh Frydenberg, in relation to concerns being voiced by the Hon Josh Frydenberg’s constituency (the electorate of Kooyong) about the small cell roll-out and in particular that TPG was putting up small cells near peoples’ homes.

522Then there are the EME regulations, which will impact the ability of TPG to use small cells, particularly in urban environments. If 5G small cells are used in urban environments, they will be closer to public areas, such as offices and residential buildings. TPG would need to give consideration to compliance with EME regulations, which are monitored and enforced by the ACMA, even though the regulations may not currently reflect proven health concerns.

523Without the need for the Court to examine the EME regulations, issues are likely to arise for the compliance of 5G small cells with EME regulations. Earlier generations of small cells had very low power (approximately 2 watts). However, 5G RAN equipment is more powerful than earlier generations and may have beamforming capability, which potentially increases the hazard zone. This is particularly the case if the small cells are deployed in urban environments on structures such as lamp posts or electricity poles and if a large number of small cells are installed to try to achieve contiguous coverage. Industry practice is to ensure a three metre exclusion zone from where the hazard zone ends and the area accessible to the general public. If the high power and beamforming 5G small cells are installed on lamp posts or poles, which are typically at a height of only a few metres from the ground, the hazard zone will be much closer to the ground so it would be harder to achieve a three metre clearance from areas accessible by the general public.

524Compliance with the EME regulations may require that the small cells be operated at a lower power to reduce the hazard zone, but doing this would consequently reduce the area over which the cell would provide coverage. That in turn impacts the number of small cells that would be required and the total cost and time required for a roll-out.

525All I conclude is that these issues would have to be considered by TPG in considering the design for its network in the light of the 5G small cell solution that is identified. Relevantly, these are other factors which add to the challenges in costing and delivering any proposed mobile network, which would have to be considered by TPG’s Board before deciding to roll-out. I put it no higher than that, but it adds to the number of potential obstacles that Mr Teoh and TPG would need to consider in any future decision to roll-out.

THE FUTURE WITHOUT THE MERGER IF TPG DOES ENTER AS AN MNO

526I address this scenario as a separate matter. However, many of the observations and factual findings made on the issue of whether TPG will re-enter the retail mobile market at all apply to this issue.

TPG

527The ACCC submitted that on the evidence TPG would be likely to be ‘an important competitive force’, operating as a direct competitive constraint on Vodafone and Optus, and less directly on Telstra.

528I do not accept that the entry by TPG would have a substantial effect on competition in the retail mobile market. TPG’s entry may have some benefit for price-sensitive customers in metropolitan areas but there is to be considered the anticipated lower quality of its network compared with that of Telstra, Optus and Vodafone. Vodafone may be the most affected of the three existing MNOs (as it targets price-sensitive metropolitan customers), but again this will not be in any way significant.

530I do not discount the possibility that in the future without the merger, both Vodafone and TPG could be competitors to a degree. As explained by Mr Smith, the customers that TPG would target as an MNO appear to significantly overlap with those customers that Vodafone would target in the future without the merger. Both Vodafone and TPG’s networks would be focused on metropolitan areas with limited regional coverage, and both Vodafone and TPG would target more price-sensitive customers.

531However, Dr Padilla expressed the view that what he terms the low end of the market is currently ‘highly competitive’–‘[a] large number of operators, including the MNOs’ second brands and MVNOs, compete aggressively on price, offering increasing amounts of data and other service inclusions’. In my view this will mean that TPG’s entry would not itself have a material impact for price-sensitive customers. I observe that, as at May 2018, Mr Teoh and MrLevy were of the view that TPG’s initial mobile offering would be ‘disruptive’. However, that was in May 2018. The MVNO witnesses gave evidence that TPG’s initial mobile plan was attractive and disruptive when it was released, but is not necessarily so now.

532The ACCC also submitted that increased competition for more price-sensitive customers in metropolitan areas in the future without the merger is likely to have flow-on effects on other parts of the market. This is the ‘transmission’ between segments which was referred to by Mr Smith and Dr Padilla in oral evidence.

533As Mr Smith explained, contrary to the view of Dr Padilla, the consumer demand for mobile services cannot be sensibly considered in two segments (high end and low end) – rather, competition will have effects across the market, because if prices are lowered in one segment, consumers in other segments will shift into that segment, and MNOs will make a competitive response.

534Dr Padilla disagreed, but conceded that this was a matter of fact, rather than economic principle.

535I am aware of various comments made by XXX XX Optus XXXX XXXX XXXX.They must be read in light of the time they were made, the level of generality in which they were expressed, the context in which they were made (by that I mean in the context of general consideration of the market at the time) and a lack of detailed knowledge of TPG on the part of the commentators. Nevertheless, as I have indicated, market participants provide a very useful indication of market conditions and dynamics.

538Whilst these statements were made XXXX XXXX XXhaving some recognition that TPG’s network would have limitations, the extent of this recognition was necessarily limited and far less than the knowledge of TPG itself and the Court after the hearing of these proceedings. The above statements were all made in different market conditions to those that pertain now or will pertain in the future.

540The dual brand strategy allows Telstra and Optus to compete at the budget end (being the most price competitive place in the market), and retain margins and profitability at the higher end. Therefore, this mechanism results in an absence of transition at the low end of the market to the higher end.

541Further, I stress it is important to look at the market now, and not by reference to an earlier period of time before Telstra introduced its dual brand strategy, and brand Belong.

542I accept the approach of Dr Padilla as XXXX XXXX XX: he looked at the market place now, noticing that the major participants address the problem of cannibalisation, and intense competition at the low end by the dual brand strategy and their involvement with MVNOs. Thus the transmission effect has been interrupted. In any event, XXXX XXXX XXX is far less direct than the immediate competitive effect that MergeCo would impose upon Telstra and Optus.

543When one takes into account the fact that whatever opportunity there once was for TPG to make a meaningful, disruptive entry as a fourth MNO has been lost, if TPG were to repeat its attempt to roll-out a mobile network in the future, such efforts could not have a meaningful impact on competition in the retail mobile market.

544Then it is to be remembered that the necessary starting point for evaluating the state of competition in the counterfactual in which TPG rolls out a mobile network is to determine what that network might look like. I have already touched upon this in discussing Mr Wright’s opinions.

545Mr Wright was asked to identify any technically and commercially feasible options for TPG to roll-out and operate a mobile telecommunications network in Australia in the next five years.

546Mr Wright accepted that his alternative model does not include any amount for opex. The effect of that omission is that the model does not account for the operating costs that TPG would need to cover to profitably supply retail mobile services using that network. I cannot assume that TPG could offer retail mobile services to customers on the same pricing terms as it announced in May 2018.

547A similar point can be made in relation to roaming. Mr Wright’s model did not include any allowance for roaming fees, notwithstanding that TPG would require a roaming agreement to satisfy TPG’s originally-stated intention of reaching 80% of the population. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. This raises at least two possibilities: the first being that TPG would enter with a roaming agreement (although that would not provide infill coverage), but would have to charge customers significantly higher prices than it proposed in May 2018. The other is that TPG would forego its plans to secure a roaming agreement, with the effect that its retail mobile services offerings would be less attractive to consumers. One cannot conclude that TPG would be competitive in the relevant counterfactual without first forming some view of what TPG would do in these circumstances.

548I turn now to Mr Wright’s evidence that TPG would not be able to offer competitive retail mobile services using his alternative network design, aspects of which I have already addressed.

549Mr Wright gave evidence regarding the type of service that could be expected from his alternative network design. In respect of the central business district, Mr Wright’s evidence was as follows:

the quality of indoor coverage would be poor. Mr Wright said the radio signals would, in some cases, fail to make it past the windows, ‘depending on the window manufacturer’. Where the signal did penetrate the building, it was possible that there would not be a signal past the first internal wall. There would be a risk that customers might lose coverage and experience call dropouts just by walking indoors;

while all indoor coverage was ‘highly likely’ to be ‘variable’, Mr Wright said it would be ‘highly variable’ between the third and fifth floor, and even more uncertain above the fifth floor of buildings. That is significant because it indicates that it is not just high rise office workers or apartment dwellers who would be affected; service would be doubtful in even relatively small multi-story buildings, and customers would risk losing calls simply by going above the third floor;

5G coverage would be particularly weak indoors;

the problems of indoor coverage would affect data as well as voice calls in the form of slowing data speeds;

outdoor coverage would also be somewhat variable. The exact coverage provided outdoors would depend on the spacing of the small cells and any clutter in the area, and there would likely be real coverage incapacity problems at the cell edge to the sides of the small cell antennas; and

Coverage in tunnels, transit centres and shopping districts would be poor, unless there were in-building coverage systems installed.

550Mr Baker of MyRepublic said that, for companies offering a retail mobile service, it is important to have good indoor coverage. Mr Davies similarly said that poor coverage resulting in calls dropping out is a matter that would be important to the consumer experience.

551Mr Wright suggested that coverage would be worse still in the balance of the proposed small cell area – the outer ring around the CBD:

indoor and outdoor coverage would be patchy with areas of holes until the roll-out was complete; and

even once the roll-out was finished, the ‘coverage consistency’ would be ‘variable’ and there would be pockets of ‘coverage shortfall, call drops and low data, particularly in directions away from the small cell antenna’.

552In the outer metropolitan area, in the areas covered predominantly by macro cells, Mr Wright said that coverage would be ‘thin’ and poor compared with the incumbent MNOs.

553Beyond the outer metropolitan area, there would be no coverage at all. Mr Wright’s model mainly covered Melbourne, Sydney, Brisbane, Perth, Adelaide, the Gold Coast and Canberra. Outside of those cities, there would be no coverage at all absent a roaming arrangement. This means that there would be no coverage in places such as Newcastle, Wollongong, the Sunshine Coast, Hobart, Townsville, Cairns, Geelong, Toowoomba, Launceston or Darwin.

554As with coverage, Mr Wright’s evidence was that the speed of TPG’s network would compare unfavourably with that of the incumbent MNOs.

555Mr Wright accepted that the type of service that TPG could supply using his alternative network design would be inferior to the service provided by Telstra, Optus and Vodafone. TPG could not compete on quality with the incumbent MNOs in this counterfactual and could realistically only compete on price. In the absence of any evidence that TPG could effectively compete on price as a new MNO, and price alone, TPG would not be a meaningful competitor to the incumbent MNOs in that counterfactual.

556Mr Wright made clear that the mobile service that TPG could deliver using his proposed network would require customers to endure substantial service limitations for even the most basic, everyday mobile functions. Customers could not depend on their phone service to receive calls or data indoors or upstairs, in train stations and shopping centres, or in the centre of the CBD if they found themselves off to the side of the relevant small cell antenna. Such poor quality service is different, for example, from budget MVNO services that provide reliable basic mobile functions, but might exclude inessential add-ons such as international roaming. On MrWright’s account, TPG would not have been able to deliver a reliable baseline service. I cannot conclude that there would be any meaningful demand for such a product, much less that there would be sufficient demand for that product for it to have a meaningful competitive impact at some future point in time when TPG enters the retail mobile market.

557Mr Wright accepted that his alternative TPG network would not deliver a service that would be attractive to commercial enterprise customers. He also said it would not appeal to any customer who wanted ‘continuity of service’ and that such users would likely use one of the incumbent MNOs. Again, it may be doubted that there is, or would be in the future, any significant customer group that does not desire ‘continuity of service’ from the mobile network.

558As I have mentioned, I accept that TPG was rolling out a predominantly small cell network in 2018 and saw a commercial opportunity to sell a low price, poor quality mobile service. However, circumstances have changed.

559Mr Wright’s alternative network would deliver a substantially inferior service to that supplied by existing MNOs and MVNOs. It would be a product that relied on customers being satisfied with a service that was of some use outdoors in the middle of the CBD (albeit at slower peak speeds than those offered by competitors), but was of doubtful utility anywhere else.

560The other variable to consider with regard to the counterfactual world in which TPG enters as a fourth MNO is time: the retail mobile market does not stand still, commercial offerings evolve and improve, and new technologies are introduced and adopted by consumers.

561I have alluded to time issues previously. TPG’s entry as a fourth MNO in the counterfactual cannot be imminent. Mr Teoh’s evidence was that he would not change his mind about his decision not to roll-out a mobile network. If he was to reconsider, this would take time and careful consideration. Thus, even in the counterfactual where entry is assumed, TPG’s roll-out will necessarily be at some point many months from now.

562On Mr Wright’s analysis, which assumed that TPG would resume its roll-out plans in September 2019, the roll-out would not be mobilised for three months (that is, until January 2020) and the first customers would not begin receiving the service until the 2021 financial year. Thus, assuming that there is some possibility that Mr Teoh and the TPG Board might change their mind next year, TPG would likely not enter the retail mobile market until sometime in 2021. On Mr Wright’s model, such entry would be with a 4G offering at a time when Telstra and Optus had been offering 5G services for two years or more. XXXX XXXX XXXX XXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

563A longer period would probably be required. TPG would need to select a new vendor, agree commercial terms, arrange for delivery of equipment, complete necessary computer simulations, complete laboratory and field testing, and obtain deployment approvals (including, for example, structural drawings and pole licence agreements).

564Moreover, the unlikelihood of TPG entering with a meaningfully competitive offering only increases as one assumes a more distant date of entry.

565As I have said already, the ACCC’s witnesses deposed to the fact that, if TPG made its May 2018 offer available to customers today, such an offer would still be attractive. The evidence of Mr Davies is an example:

In my view, the offer TPG made in May 2018, if offered today, would still be an attractive one due to the price point and data consumption level, even if the TPG offer would have more limited coverage than other MNOs.

That evidence was based on a misconception as to the service offered by TPG.Mr Davies did not appreciate it was a data only offer, with no voice or text service. Further, the question is not whether a TPG offering would be attractive today, it is whether it will be competitive in the relevant future.

566Icannot conclude that there is any likelihood or any real chance that TPG could offer a competitive offering in the next five years. It must be recognised that prices in the retail mobile market have been falling and data inclusions have been increasing. This will impact heavily on TPG’s past strategies. Further, as Mr Smith acknowledged, the MNOs’ strategies for competing in the low end or price sensitive segment of the market XXXX XXXX XXXXX were influenced to some extent by TPG’s announcement and these have already been implemented:

As you go through the history of how mobile phone pricing in Australia and other countries has evolved, once you let the genie out of the bottle it is difficult to go backwards.Once Telstra accelerated the launch of Belong it would be difficult for it to un-accelerate that launch or take back that launch two years later.Once Telstra, Optus and VHA had moved to lower contractual commitments, it’s difficult to go back on that.

568There are currently offerings that would closely compete on price and data inclusions with the kind of offer that TPG announced in May 2018, and which, when one has regard to the coverage and quality of the service, would prevail over the putative TPG offer. And there is little doubt that prices will continue to fall, and data inclusions will continue to rise in the future.

569Mr Teoh explained the position in answer to a question from the Court as follows:

I want your view as to what you would – I won’t put it as high as recommend to the board, but what would your view be as to the way forward?---Okay. Let’s say without any restriction we can use the current equipment and Huawei and the 5G.

Yes?---I have to look at what we have, and … the business prospect. The market is moving on to 5G.So for us to be a viable business I have to be forward looking.I have to implement something, let’s say … three years down the track.I need to be able to compete. And the product that I need to be able to compete is a mobile product, the mobile fixed wireless product, and I’m able to compete with Optus and Telstra to compete in the marketplace. And what do we have at the moment to compete? We … have limited spectrum, especially the 5G spectrum, because we have to have 5G. We cannot implement 4G and hopefully wait for 5G to implement 5G three, four years down the track, because then … we will be selling an obsolete product and people will be selling a market leading product of 5G and TPG spent all the money coming up with an obsolete product where the market is a 5G market. So it does not make commercial sense in that respect. That’s why we keep saying that TPG must roll out with the 4G and the 5G solution now. Then down the track we’re able to compete.Otherwise, there is no business case. Then we look at what we have.We only have 30 megahertz of the 3.5 gigahertz spectrum. And Mr Hanly presented to our board compared to the market today. Optus is selling the 5G, 50 megabit per second unlimited plan for $70, which is actually NBN replacement. Because NBN 50 megabit per second, TPG selling at 69.99. And then I look at – because we have 1.9 million fixed line customers. So one of the earlier idea is to go into mobile.Also, hopefully, we can migrate our non-profitable NBN business into our mobile, so that we … increase our profitability, because it is our net service.So we reduce the NBN cost component, which – like, 50 megabit NBN cost is about$45, and we hardly make $20 – less than $20. So … we have to move that NBN to the fixed wireless. There’s one product we have to sell. Then we look at what we have – the 30 megahertz of the 3.5. We can’t do it.Even I put up the 5G today, even there is a solution like what you say, there is no Security Ban, I put up the … 4G, 5G, I put up the Massive MIMO. I’m not able to do it even today, even to compete with Optus. And the market in three, four, five years’ time, people demand for capacity, demand for speed, because of the user demand and also because of the technology development. So you envisage that the usage and the speed would go up. But what TPG has, there is a limitation because of the spectrum constraint that we have. So we will never get there. And what Telstra and Optus can do is keep driving us – this competition in Australia.

I accepted this evidence of Mr Teoh. Other evidence supports this approach.

570Dr Padilla considered that the low end or price sensitive segment of the market was already very competitive. He found that, not only were the MNOs competing in this segment with their primary brands, but also with their second brands. He also considered that the MVNOs were competing aggressively in this segment. Given this, and having regard to the nature of TPG’s product, Dr Padilla considered that the impact of TPG’s product offering was limited.

571For these reasons, there is no likelihood or real chance that TPG’s May 2018 offer would be competitive at some future point of entry. That is particularly so given that the alternative network design proposed by Mr Wright and advanced by the ACCC would see TPG entering the retail mobile market with a poor quality 4G product in an increasingly 5G world.

572I briefly survey the expert economists’ view of TPG’s entry. I do not regard the view of the experts as decisive, and place much more reliance on the participants in the retail mobile market in Australia.

573Dr Padilla’s view was that TPG would have minimal competitive impact assuming its entry as an MNO. This is the view I prefer.

574Dr Padilla expressed the opinion that TPG’s entry would face severe limitations. To a large extent these reflect the reasons why TPG has decided it will not enter the retail mobile market and include the facts that:

TPG would have significantly less coverage than the other MNOs and face high roaming charges;

TPG’s network would have poor quality and very limited capacity;

TPG’s expected pricing would have very little impact on competitive outcomes; and

TPG would be later in supplying 5G.

575Based on these constraints, Dr Padilla concluded:

TPG would struggle to establish itself as a credible competitor, with even poorer quality than VHA and more limited coverage. TPG would be likely to only gain a presence at the low end of the market, which is already highly competitive. Moreover, TPG would not be expected to materially impact outcomes in the low end because of its expected poor quality, limited capacity, reliance on costly roaming (assuming it does obtain a roaming agreement) and very high cost to expand capacity given its limited spectrum holdings.

576To put TPG’s difficulties into context, Dr Padilla recalled Vodafone’s significant and sustained loss of subscribers following Vodafail, and observed that TPG’s network would have substantially worse coverage and quality than Vodafone’s network.

577In relation to the argument that TPG’s threat of entry would benefit competition by prompting a competitive response from MNOs, this has already occurred. Mobile customers enjoy the benefit of that competitive shift, regardless of whether the merger proceeds or TPG enters absent the merger. This point was acknowledged by Mr Smith, where he acknowledged that competitive responses, such as the launch of Belong, lower contractual commitments, and SIMO post-paid plans are now just part of the competitive landscape. As Mr Smith put it (as I have mentioned), ‘[a]s you go through the history of how mobile phone pricing in Australia and other countries has evolved, once you let the genie out of the bottle it is difficult to go backwards’.

581Based on the evidence, Dr Padilla’s assessment was that in the absence of the merger, and even assuming TPG’s entry, ‘there is a significant risk that competition in the retail mobile market would weaken’.

582As to the limited competitive impact of TPG, Dr Padilla considered that the nature of the product TPG could offer as an MNO was limited in quality. Without roaming, TPG faced offering a mobile product which had limited coverage relative to the other three MNOs, was of poor quality and had limited capacity. The capacity of the TPG network limited the number of customers it could target. This limitation in turn had an impact on how aggressive TPG could be in its pricing. TPG would need to discount its prices simply to attract customers because of its poor quality. Further, once TPG had commenced acquiring subscribers, and as it neared its capacity on the network, it would need to cease pricing aggressively.

583This is an important characteristic of many markets. XXXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXXX XXXXX XXXX XX. Pricing aggressively entails not only the incentive to do so but also ability. As Dr Padilla put it:

[T]he incentives of a small operator to acquire new customers is not the only factor determining prices and, in an industry where economies of scale are important, smaller firms may not have the ability to sustainably offer lower prices because of the need to cover their total costs. The cost of supplying additional volumes is an important driver of prices in mobile markets and Optus has led recent price reductions, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX.

584Mr Smith reached a different conclusion. His view was that TPG would exert an important competitive constraint on not only Vodafone but also the other MNOs. The reasons he provided were:

(1)TPG has been an effective and successful competitor in adjacent markets, adopting an aggressive approach to pricing and introducing innovative retail products.

(2)TPG would enter with aggressive, low priced offerings.

(3)TPG had previously stated its intention to enter as an MNO, to provide innovative products, and to compete effectively with the existing MNOs.

(4)TPG would have an incentive to enter into some form of network sharing agreement, possibly with Vodafone.

(5)TPG would likely target price-sensitive customers located in metropolitan areas and TPG’s customer base would likely overlap significantly with that of Vodafone.

(6)XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX.

585Dr Padilla addressed these reasons as follows. He said, for example, that it is more relevant to address what TPG will be able to do upon entry, rather than to consider what TPG says it will do or has done in different circumstances. Moreover, at no point in Mr Smith’s analysis of any of these factors did he come to grips with the fact that TPG’s mobile product offering would be of poor quality and limited capacity. This has considerable implications. For example, TPG would simply need to discount its price to adjust for the quality of its product. A low priced product reflecting poor quality is not an aggressive price. Nor did Mr Smith adequately address the impact limited capacity will have on TPG’s ability to price aggressively. His response was that it is ‘reasonable to expect TPG would, like all other MNOs, assess its capacity requirements on an ongoing basis and update its capacity investment plans accordingly, including through the ongoing consideration of network sharing arrangements, and upgrades to newer, more efficient technologies’.

586I note that Mr Smith accepted that the likely quality of the network is a factual question for the Court. I have already addressed this issue. Further, Mr Smith considered that poor network quality may be addressed by a roaming agreement and that the weight to be attached to network quality and coverage will likely vary by customer and that there may be some customers who are prepared to sacrifice quality in exchange for lower prices. Mr Smith considered that an inferior network quality may not be a material barrier to TPG winning the price-sensitive customers that it was targeting.

587As to price and quality, I do not accept this conclusion of Mr Smith and prefer the analysis of Dr Padilla. To conclude that TPG would compete effectively with Vodafone and the other MNOs in the counterfactual, notwithstanding its inferior quality, would have required Mr Smith to identify a customer segment which he considers would be attracted to such a product. I do not consider Mr Smith’s views are persuasive without further knowledge about such things as the nature and extent of the quality differences, the extent to which there would be customers who would be prepared to sacrifice network quality for a lower price, the extent to which TPG would need to discount price to compensate for the quality differential, whether the discounted price would be sustainable, andthe impact TPG’s offering would have in the market, having regard to the existing state of competition. In addition, and significantly, poor network quality would not be addressed by a roaming agreement in the circumstances of TPG entering into the market in the future.

Vodafone

The submissions of the ACCC

588The ACCC submitted that the evidence establishes that:

(1)Vodafone has, since Vodafail, significantly improved its network and the quality of the mobile product it offers Australian consumers to the point where, as stated by Mr Berroeta, its position is one of ‘strength and momentum’;

(2)Vodafone has already taken steps to manage congestion and has a well-developed RAN Refresh program that will be rolled out XXXX XXXX XXXX XXXX XXX, along with other works on its network;

(3)Vodafone’s program of works is costed and fits within its existing capex envelope (no increase in the levels of shareholder support is required);

(4)the likely congestion on Vodafone’s network is at significantly lower levels than the levels assumed by Vodafone’s lay witnesses, and which levels underpin their concerns about Vodafone’s competitive position in the future;

(5)Vodafone intends to roll-out its RAN Refresh program more quickly than the pace which was assumed in Vodafone’s modelling of when congestion will peak and how many sectors would be ‘congested’ before congestion eases;

(6)even at what Vodafone contends are high levels of congestion, the network performance still allows the vast majority of users to stream content at recommended speeds; and

(7)Vodafone has the continued support of its shareholders whose commitment to supporting Vodafone has been repeatedly reiterated – neither of the shareholder witnesses sought to resile from those statements.

589As such, in the ACCC’s submission, the Court ought not to accept the negative prognostications of Vodafone’s lay witnesses as anything more than statements of concern. The ACCC contended that the facts do not bear out the opening contention that Vodafone will cease to be an effective competitor against Telstra and Optus if the merger does not proceed.

590The ACCC contended that it is important to be clear at the outset about what Vodafone means when it talks about ‘congestion’. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXas ‘the point at which users are more likely to notice the effects of a decline in network performance’.

592So it was contended by the ACCC that where Vodafone describes a site as ‘congested’, it does not necessarily follow that the experience of customers is adversely affected. Identification of a site as ‘congested’ serves, rather, as a ‘canary in the coalmine’ to alert Vodafone to the need to take remedial action and to raise that alert in sufficient time for it to be acted on – as Vodafone is doing and will continue to do.

595It was submitted that it is Vodafone’s ability to continue to compete in these current areas of focus that is relevant to the Court’s consideration of Vodafone’s position if the merger does not proceed; analysing Vodafone’s market share by reference to the whole of Australia is apt to mislead.

596Since Vodafone’s response to Vodafail, customer perception of its network has improved. Following Mr Berroeta’s arrival in the wake of Vodafail, Vodafone has gone from being the most-complained about mobile service provider to being, ‘for the last three years, probably’, the least-complained about mobile service provider. It has the lowest rate of complaints and the highest net promoter scores among the MNOs. In the first quarter of 2014, the rate of complaints to the Telecommunications Industry Ombudsman made by Vodafone customers was almost 2.5 times the industry average. In the first quarter of 2019, it was around 2.5 times lower than the industry average. In his expert report, Mr Smith observed, consistently with MrBerroeta’s evidence, that Vodafone’s complaint rate has declined to the point where in the second quarter of 2019, it was assessed at 2.7, compared to 7.2 (Telstra), 7.7 (Optus) and 6.6 (industry average). In Vodafone’s 2019 budget it is stated that Vodafone was the ‘least complained about telco in 2018’, and had a net promoter score five points ahead of Optus and 18 points ahead of Telstra. Mr Berroeta accepted that the quality of experience for Vodafone’s customers has not fallen below an acceptable level. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

597Vodafone presently maintains a competitive offering, particularly in metropolitan areas, and will continue to do so, and compete effectively with Telstra and Optus.

598In its written opening submissions, Vodafone stated that ‘Vodafone’s access to funds for capital expenditure is constrained’. However, the ACCC pointed to the evidence that:

(1)Vodafone will likely have a capex budget (excluding spectrum) for 2020 and following years of at least XXX XXXXXXX;

599Therefore it was submitted that in the future without the merger Vodafone will continue, as it has done in the past and is doing presently, to apply its capex to maintain and upgrade its network, and address congestion in order to remain competitive.

600It was submitted that it is an inevitable part of being an MNO that money must be spent on network and spectrum. Just as Vodafone’s shareholders supported the necessary capital to maintain a competitive network in response to Vodafail, so too they are supporting Vodafone’s continued investment in its network and may be expected to support Vodafone’s participation in future spectrum auctions, subject to establishing bidding limits having regard to the business case presented.

602Vodafone’s other shareholder, Hutchison Telecommunications (Australia) Limited (‘HTAL’)– an ASX-listed subsidiary of CK Hutchison Holdings Limited (‘CKHH’) – recently confirmed its commitment to supporting Vodafone in an announcement to the ASX, in which it stated that it ‘remains committed to Vodafone and will continue to support Vodafone in the future’. This statement of support is consistent with other positive statements HTAL has made about Vodafone. In statements to the ASX, HTAL has said that ‘Vodafone continues to perform strongly in a competitive environment’ and that ‘Vodafone is well-placed to continue achieving steady, modest customer growth’. Vodafone Group’s 2019 Annual Report stated that Vodafone ‘continued to perform well in a competitive environment’. Similar statements of shareholder support are expressed in Vodafone’s most recent annual report (dated 31 December 2018, but confirmed by the Vodafone Board on 21 February 2019), which made reference to the continuing ‘backing of its ultimate shareholders’. The substantial majority of the members of the Vodafone Board are non-independent nominees of the shareholders; their position necessarily reflects the position of the shareholders.

603When the intended merger was announced, Mr Berroeta described Vodafone as ‘a company with a track record of reliability, stability and a fantastic customer experience which has seen the business prosper’, and that it is in ‘a position of strength and momentum’.

604Furthermore, the ACCC submitted that it should not be overlooked that a substantial contribution to Vodafone’s recent net losses has been made by the guarantee fees charged to it by its own shareholders’ parent entities. These have accrued at about $150 million each year, in circumstances where, for example, Vodafone’s loss in 2017 was $177.8 million and in 2018, $124.4 million. In 2018, the shareholders received the benefit of the guarantee fees when the close out of a cross-currency swap was applied to pay down the guarantee fees which had accrued: ‘guarantee fees payable to shareholders’ decreased from $768 million to $7 million.

609The ACCC contended that the Court cannot assess the competitive position of Vodafone on the basis that it will be affected by congestion reaching a point where it is required to shed market share (so as to maintain an acceptable quality of service). Nor can the Court be satisfied that congestion will otherwise impinge on its commercial offerings or customer experience.

610While the ACCC accepted that data usage is growing, the ACCC contended that Vodafone’s case rests on an overstatement of the expected CAGR. Vodafone stated that it is facing a CAGR of data usage on its network of XXX. This is the figure that Mr Berroeta adopted as his understanding of the current CAGR, based on his discussions with Vodafone’s technology team. The CAGR figures, which Vodafone invites the Court to accept as projections of the likely future growth and impact on its network, are drawn from Vodafone’s work to model congestion for the purposes of its network upgrade.

611The ACCC contended that the expected CAGR is important because forecast data growth assumptions are critical inputs to Vodafone’s ‘Business Volume Metric’ (‘BVM’) and to Vodafone’s network planning. These assumptions underpin much of Vodafone’s case about the congestion difficulties it faces in the future without the merger. Because the CAGR is a compound rate, what appears to be only a small difference can have a large effect on projections over the next five years. Changing the CAGR from XXX XX XXX nearly halved the projected number of congested sites in Mr Lopez’s top 12 analysis.

612Vodafone finalised two BVMs in May 2019: one with a XXX CAGR forecast, and the other with a XXX CAGR forecast. These CAGR forecasts were calculated by Mr Sivagnanam and his team. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX. The forecasts underpin recent congestion modelling undertaken as part of the RAN Refresh planning, which Vodafone seeks to rely on to XXXX XXXX XXXX XXXX XXXXX XXXX XXXX.

613The ACCC submitted that neither the XXX XXX XX CAGR projections accurately reflect the likely CAGR of data usage over the next five years, and that as a result the Court should not accept that Vodafone’s congestion problem is as serious as Vodafone suggests, nor that congestion will hobble Vodafone rendering it unable to continue to act as an effective competitor to Telstra and Optus.

614Mr Sivagnanam explained that he came up with the CAGR forecasts using both a ‘top down’ and ‘bottom up’ approach, and that central to the ‘top down’ analysis were certain CAGR forecasts for mobile data traffic published by equipment vendors. However, the ACCC contended that:

(1)none of those industry reports focused on Australia;

(2)none of them contained a forecast CAGR as high as XXX;

(3)while it was Mr Sivagnanam’s practice to focus on countries with higher 4G data penetration, such as the US – ‘because historically mobile data growth in Australia has followed trends in North America’ – he cited a global CAGR forecast from one industry report despite that report also containing a lower CAGR forecast specifically for North America; and

some reports reflect anomalous data or data which are not informative of the position reasonably to be expected in Australia in the coming years – for example, high global monthly data traffic growth between the fourth quarter of 2017 and the fourth quarter of 2018 XXXX XXXX XXXX XXXXX XXXX XXX relied upon by Mr Sivagnanam, was driven mainly by increased traffic per smartphone in China.

615XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX the ACCC submitted that the Court should reject any suggestion that Vodafone will need to contend with a XXX CAGR for data. That is also supported by the evidence of Mr Wright that in his experience over time the CAGR for data growth was between 30% and 40%, although it was ‘not uncommon to have a year or something of high growth’ and that ‘[u]nlimited plans will probably see a spike in consumption, then stabilising again’.XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

619While these errors and biases to high CAGR projections may not have mattered to Mr Sivagnanam and his team XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX,it was submitted by the ACCC that they do matter when Vodafone invites the Court to rely on them to found submissions that, in the absence of the merger, Vodafone will experience rising congestion beyond its capacity to address, and which will cruel its competitive position.

620The ACCC contended that the likely position is, in fact, less grave than Vodafone portrays it to be, even in its most recent modelling. That up-to-date modelling is set out in a ‘RAN Refresh update’ presentation dated 29 July 2019. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX:

the Court should not be satisfied that the congestion problem Vodafone faces is as serious as Vodafone suggests.

624XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX,meaning that it is doubtful Vodafone’s competitive position would be adversely affected materially or for any duration. In any event, Vodafone’s network will over the next five years provide a service of sufficient quality for the vast majority of Vodafone’s mobile customers.

625The ACCC contended that just because a site is deemed ‘congested’ does not mean that the user’s experience falls below acceptable levels. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX. This is faster than Netflix’s recommendation for streaming in standard definition 360p (1.5 Mbps). Similarly, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX, and thus sufficient for standard definition Netflix. It is common ground that streaming is ‘data hungry’; thus, the experience of users who are not streaming is even less likely to fall below an acceptable level.

626In addition, because Vodafone’s network planning is based on a CAGR XXXX XXXX XXXX XXXX XXXX XXXX XX, over the relevant timeframe its network is likely to have excess capacity.

628Mr Berroeta accepted in cross-examination that Vodafone is ‘doing many things’ to address its congestion difficulties. As well as acquiring new spectrum, Mr Berroeta stated in his affidavit that Vodafone has re-deployed almost all of its available spectrum to the 4G network (which has involved the closure of Vodafone’s 2G network and ongoing migration of its 2100 MHz spectrum from its 3G network to its 4G network), upgraded its RAN equipment and deployed new antennas to add capacity to existing sites, upgraded its core network to provide more capacity, and upgraded its backhaul transmission network. Mr Sivagnanam explained that six major projects over the past three years have looked at how to increase Vodafone’s RAN capacity.

629The ACCC contended that the RAN Refresh program is a key part of Vodafone’s response to congestion. It will take place whether or not the merger proceeds. It fits within the capex envelope approved by Vodafone’s shareholders.

630As part of the RAN Refresh, Vodafone will swap certain of its 4G Huawei equipment and add capacity to its network and enable upgrade to and roll-out of 5G equipment. According to the most up-to-date document setting out details of the RAN Refresh plans:

632In the ACCC’s submission, it is likely that Vodafone will do more than carry out its RAN Refresh program to address congestion: to the extent that Vodafone believes it will be better able to address congestion if it shares the costs of infrastructure or spectrum in the future with the merger, it follows that it has an incentive to pursue cooperative arrangements, such as network and spectrum sharing. Two such arrangements are prominent in the evidence: the eJV with Optus and the joint venture with TPG.

639The ACCC contended that the evidence of Vodafone’s willingness to consider cooperative arrangements is consistent with the point made by Mr Smith that, if Vodafone and TPG believe they will gain ‘substantial benefits’ from combining their network assets and spectrum holdings in the merger, it follows that, in the future without the merger, Vodafone and TPG would still have strong incentives to pursue, through some form of network sharing, these same benefits. Mr Wright also notes that network sharing is one of the options Vodafone could pursue to address congestion absent the merger. He suggests Vodafone would likely take an approach involving one or more of: managing marketing and plans to reduce traffic growth; executing network modernisation plans; funding higher levels of capex to ‘de-risk’ the transition period to 5G; deploying 5G in areas of greatest need; seeking additional mid-band spectrum; leasing spectrum from TPG; and entering into a network sharing arrangement involving active sharing (in the form of Multi Operator Radio Access Network (‘MORAN’) or Multi Operator Core Network (‘MOCN’)).

640The ACCC submitted that Vodafone’s interest in sharing was, and is, real. The Court ought, in the ACCC’s submission, act on the evidence found in Vodafone’s business records as to its actual interest in sharing, rather than on Dr Padilla’s opinion that Vodafone would (in his view) have no interest in sharing or in any way assisting TPG.

642In the ACCC’s submission, the Court should proceed on the basis that the extension of the eJV is likely to occur. As to sharing more broadly, the evidence shows that XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. Accordingly, the Court cannot assess the future without the merger on the basis that Vodafone has no options available to it to augment its sharing arrangements, or that any such options would be rejected out of hand by its shareholders.

643The ACCC then made submissions on 5G and the claimed impediment of being ‘late’ to 5G made by Vodafone.

644The ACCC noted thatVodafone is rolling out 5G equipment as part of its RAN Refresh program and will, in future, offer 5G services. However, Vodafone says that, as a result of the Security Guidance, it will not be able to deliver 5G services until after Telstra and Optus, which will put it at a competitive disadvantage to those operators. (Vodafone describes this as being ‘late’ to 5G, regardless of the level of 5G device penetration or whether any use cases for 5G are available to customers). The ACCC contended that the fact is, as Mr Berroeta accepted in cross-examination, Vodafone was always going to be ‘late’ to 5G; being ‘late’ to 5G was not a function of theSecurity Guidance.

645The ACCC submitted that Vodafone was always going to be ‘late’ to 5G because its plan to move to 5G was driven by congestion planning – ie having the 5G network built up so as to take over load from the 4G network. But for the 5G network to fulfil that objective, handset penetration among the customer base needs to rise to a level where a sufficient number of customers have 5G enabled handsets.

649The ACCC contended that the evidence indicates that, in any event, the real benefits of 5G are some way from being realised. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX. There are only limited numbers of 5G compatible handsets on the market. His evidence is also consistent with that of Mr Bromhead of Ericsson that ‘today the benefits of 5G over 4G are limited’, and that those benefits would increase but that it typically takes technologies ten years to mature. Further, there is evidence that 5G services may not be as important for price-sensitive customers, because such customers ‘tend to be focused more on price and the level of data allowances’.

651As to Vodafone’s position in the corporate and government sector, the ACCC pointed out that Vodafone’s fixed business is in the early phases of its evolution, and is being expanded gradually. It was only launched in December 2017, and cannot be considered a ‘mature’ business whose full potential has been realised.

652XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX. It has the capacity to grow the sophistication of its fixed offering, if it sees advantage in so doing. For example, Vodafone has not, but could, consider the opportunities NBN’s move into Enterprise Ethernet may provide. Mr Berroeta accepted that such a move may present an opportunity for Vodafone to offer a higher grade of fixed service to business customers.

653XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. The directors’ notes to the Vodafone 2018 year-end financial report suggest that Vodafone is making inroads, and signing ‘major business customers across a variety of industries’. Further, even if Vodafone’s offering does not meet the needs of some large corporate and government clients, they represent only a portion of the business sector, and that sector is only a very small part of the retail mobile market as a whole.

654The ACCC pointed to the evidence of Mr Davies, of Macquarie Telecom Group Pty Ltd, that some customers would choose more expensive, higher coverage plans for some staff, and use lower cost plans elsewhere to reduce their overall costs. He also gave evidence that in the last six or seven years there has been a trend away from bundling in the business sector, and a ‘propensity to, perhaps, consume mobility from a different provider to the data network’.

655In the ACCC’s submission, the Court should not make much (if anything) of Mr Berroeta’s evidence or the limited and ad hoc collection of emails tendered by Vodafone which mention the customer wanting a ‘whole of business’ solution (in most cases along with other matters). Nor can Dr Padilla’s evidence rise above the evidence and assumptions provided to him, which were based on Mr Berroeta’s affidavit. It was submitted that in order for the Court to reach any conclusions on the relative importance of the ability to offer a sophisticated fixed service to winning corporate and government mobile business, a much closer analysis is required of the relevant requests for proposal (‘RFP’), Vodafone’s response to them and the extent to which RFPs permit (or the client permits) the proffering of a mobile-only solution would be required.

656In the ACCC’s submission, over the next five years, Vodafone will remain an effective competitor to Telstra and Optus, particularly in metropolitan areas. Partly this is because, as has already been identified, Vodafone’s congestion difficulties are not as severe as Vodafone suggests they are. It is also because Vodafone is, in any event, acting to address these difficulties, and will continue to do this absent the merger. This evidence undermines DrPadilla’s opinion that Vodafone in the future without the merger will become less competitive. That opinion rests on the view that ‘with limited resources available to invest, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. The evidence indicates that this view is wrong. Dr Padilla’s opinion should be considered in that light.

657It was submitted by the ACCC that there is scant evidence that Vodafone is managing, or will in fact have to manage, its offering to shed any segment of its customers so as to relieve demand on its network. Its suggestions that it will need to do this in the future are unsubstantiated. MrPham’s evidence was that since July 2018 Vodafone has, at times, not directly matched Telstra or Optus offers because of concerns about the impact of increased data usage on Vodafone’s network. However, the ACCC submitted that:

(1)the evidence is that, to date, Vodafone has been able to manage its congestion and still maintain a competitive offering;

659While Vodafone will clearly not be among the first MNOs to offer 5G services, the alleged competitive impact of that position is unsubstantiated and this Court cannot be satisfied it would be material. Moreover, this is a fact whether or not the merger proceeds.

660It was submitted by the ACCC that Vodafone will continue, as it has, to focus on making competitive offers to metropolitan mobile consumers, while seeking to grow its enterprise unit, supporting those efforts with its program of works on its RAN, as well as the myriad other business initiatives which Vodafone pursues to differentiate itself in the market.

661The ACCC made the following further submission. Mr Smith identified that other claimed efficiencies relied on by Dr Padilla were purely pecuniary effects which might result in increased revenues or costs savings for MergeCo relative to Vodafone and TPG on a stand-alone basis, but are unlikely to or may not have any material impact on the ability of MergeCo to compete in the retail mobile market. He considered that there was insufficient evidence to conclude that any merger specific benefits would have a substantial positive effect on competition in the retail mobile market.

Consideration of the position of Vodafone

662To understand the competitive position of Vodafone in the retail mobile market today it is necessary to have regard to the company’s fortunes over the past decade. When Vodafone was formed in 2009, its shareholders contributed X XXXXX in equity to Vodafone for the purpose of enabling the company to build scale and grow its customer base. However, as already noted above, commencing in December 2010 and continuing for a number of years, Vodafone experienced a period of serious network issues arising from a variety of factors. These issues resulted in Vodafone customers experiencing high rates of dropped calls and poor internet activity, and attracted substantial adverse publicity. This event –namely, Vodafail – resulted in Vodafone losing approximately two million customers and significant market share.

663In the years immediately following Vodafail, Vodafone invested heavily in its network in an effort to recover. In each of 2013 and 2014, Vodafone’s capex exceeded $800 million, and that expenditure was funded through external bank debt guaranteed by its shareholders Vodafone Group and Hutchison Whampoa Ltd (now its successor, CKHH). Vodafone’s market share has never completely recovered from Vodafail.

664As already noted, Vodafone’s business is not, and has never been, profitable. It has made losses exceeding $100 million in each of the last five years and has net assets of XXX XXXX. Vodafone’s net debt has increased each year over this period, and now totals approximately XXXX XXXX. Of that net debt, approximately XXXX XXXX is owed to third-party banks (through a wholly-owned subsidiary of Vodafone) and is guaranteed by Vodafone’s shareholders, Vodafone Group and CKHH. That external debt is around seven times Vodafone’s EBITDA. Vodafone is balance sheet insolvent and relies on letters of support from its shareholders in respect of its external debt to continue as a going concern.

665I accept that a significant aspect of Vodafone’s poor financial performance in recent years is that the business has only occasionally realised positive free cash flow on an annual basis. In the years 2012 to 2018, Vodafone recorded positive annual free cash flow only twice (in 2016 and 2018). As Mr Badrinath, a director of Vodafone explained, free cash flow is an important indicator of the financial health of Vodafone because a positive free cash flow result indicates that Vodafone is able to finance its own capex and spectrum requirements, and to service its debts. Conversely, a negative free cash flow result indicates that, in any given year, Vodafone has been unable to support itself on a standalone business, which is not sustainable over time.

668The ACCC contends that Vodafone’s financial difficulties were overblown. It was suggested to a number of witnesses, for example, that Vodafone had ‘headroom’ on its working capital facility and could draw down further on that facility to fund future capex. Any further draw down on working capital would only further enlarge Vodafone’s debt. Mr Sixt explained that the purpose of a working capital facility is to finance working capital, which fluctuates with the company’s day-to-day operations. Mr Sixt acknowledged that working capital facility is large, but that is because it is ‘meant to ensure that in the theoretical emergency’, the company could access funds quickly.

671Even if there were a realistic prospect that further investment in Vodafone would result in a meaningful return on investment, there are practical limits on CKHH and Vodafone Group making such an investment. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

674I am satisfied that Vodafone will be required to ‘make the best of it’ in the future as Mr Sixt described because that has been the shareholders’ directive to Vodafone for some time. MrBerroeta’s evidence was that, over the past five years, the shareholders had consistently conveyed to him that capex was to be reduced; that Vodafone should not seek increased funding from the shareholders or support for more external debt; that it was not sustainable for the shareholders to continue to support high investments in Vodafone with no return; and that their priority was for Vodafone to become a self-sustaining business. In response to those discussions, Mr Berroeta has conducted the business of Vodafone on the basis that requires the company to not increase its overall debt burden, to maintain capex within the current XXXXXX XXX per annum budget and to limit and reduce its costs. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX.

675In the directors’ report that forms part of its 2018 financial statements, there were positive statements made about Vodafone’s future. Those were statements that: ‘VHA is well-placed to continue achieving steady, modest customer and financial growth, despite ongoing aggressive competition among the Mobile Network Operators’ and ‘in 2019, VHA will continue to invest in innovative, competitive mobile and fixed services and products which offer value inclusions and flexible options to Australian customers’. The prospect of modest growth despite aggressive competition is a warning of difficulties ahead. That is particularly so when one has regard to the context of these statements in the document as a whole. The financial statements reveal the financial challenges facing Vodafone in complete numerical detail. I do not regard the observations of the directors as expressions on unequivocal positivity. Vodafone is continuing to achieve modest gains, and to invest in its business. There is a realisation though that the challenges it faces are significant.

676I accept the submissions of the ACCC that the ‘financial difficulties’ may be overcome by shareholder support, and this has been forthcoming in the past. However, I now have evidence which puts this shareholder approach in a different light, and I would expect it to be conducted in accordance with the observations of Mr Sixt.

677Therefore, it seems Vodafone faces financial difficulties that are unlikely to materially change absent the merger, and those financial difficulties will limit the extent to which Vodafone can invest in, and grow its business, in the counterfactual. Then, given its financial situation, in a world without the merger, Vodafone would likely XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

680With shareholder support (which I have already mentioned) Vodafone’s financial difficulties have real competitive consequences for Vodafone given the capital-intensive nature of the retail mobile market. An MNO must constantly invest in its network, so as to introduce new technology and products, improve service and expand network capacity (including by acquiring spectrum and building and upgrading sites).

681Whereas mobile devices were once limited to making telephone calls and sending text messages, today they are used for such things as browsing the internet, streaming music and video and live-streaming video calls. These more recent uses are much more data-intensive and have driven large increases in the amount of data used on mobile networks.

682In recent years, the rate of data usage on Vodafone’s network has been growing. Vodafone’s actual data growth rate was XXX in 2016, XXX in 2017 and XX in 2018. In the 12 months to June 2019, the total data carried on the network grew by XXX compared to the preceding year. These high growth rates appear to reflect a general trend towards greater data usage on mobile networks, with Telstra reporting in 2018 that it was experiencing traffic growth on its network of 50% year-on-year.

683These high rates of data growth have implications for Vodafone’s level of competitiveness in the future without the merger, as the volume of data traffic on a mobile network affects service quality.

684The capacity of any given sector of a base station to provide a mobile service to customers is limited. The capacity of a sector varies depending on the spectrum deployed on the base station site. In 4G LTE networks, such as that operated by Vodafone, the measure of a sector’s capacity is a ‘physical resource block’(‘PRB’), and the extent to which the capacity of a sector is being used at any time is measured as a percentage of the total PRBs that are being utilised. In general, as capacity utilisation increases, the average download throughput speed from the sector decreases.

685At very high levels of utilisation, a sector will deliver a noticeably degraded service to customers. Vodafone, for example, operates on the basis of an objective that, at a minimum, it must ensure that customers realise a data speed of X XXXX to all of its customers (including during the network’s busiest times), which equates to the throughput necessary to permit customers to stream XXXX XXXX XXXX video. To ensure that all customers served by a sector receive that quality of service, Vodafone must ensure that the average busy hour download throughput on a sector is X XXX, as this equates to roughly X XXXX at the edge of the sector’s coverage. Historically, Vodafone has regarded a utilisation rate of XXX in the busy hour as the critical threshold for ensuring that Vodafone can continue to deliver this minimum service level. In other words, Vodafone has treated a PRB utilisation rate of XXX as the point above which a sector will no longer be providing acceptable service to customers.

686Mr Sivagnanam detailed how customer experience is affected at various threshold utilisation rates. At utilisation rates of XXX to XXX, Vodafone’s analysis is that it would be failing to deliver its objective of a minimum service standard of X XXXX to approximately XXX of its customers served by that sector. At utilisation rates of XXX to XXX, Vodafone would be failing to deliver its minimum service standard to XXX of its customers served by that sector. And, at utilisation rates above XXX, around XXX of Vodafone’s customers would be receiving a service below Vodafone’s minimum service standard.

687Vodafone has adopted a minimum service level of X XXXX. This is a baseline below which Vodafone aims not to fall. The evidence is that some services that customers demand and use (such as video calls) require throughput speeds well above 1.5 Mbps.

688Given the impact that a lack of capacity can have on service quality, Vodafone has historically treated a utilisation rate of XXX for a given sector as a trigger point for scheduling a site upgrade of the affected site. More recently, it has increased this threshold to XXX in a move that Mr Sivagnanam described as a ‘calculated risk’.

689However, whatever threshold is used, that the number of sites on Vodafone’s network that are ‘congested’ (in its terms) has grown substantially in the past two years.

691This trend towards increasing congestion on Vodafone’s network is anticipated to continue into the future. In the ordinary course of its business, Vodafone prepares forecasts of the anticipated future increase in traffic on its network (a metric it refers to as the ‘BVM’). The most recent BVM was adopted in May 2019. At that time, Vodafone adopted a lower range BVM with traffic growing at a CAGR of XXXand an upper range BVM with traffic growing at a CAGR of XXX.

692I find that the data CAGRs of XXX and XXX were appropriate and realistic forecasts of the lower and upper bounds of expected data volume growth on Vodafone’s network in the next five years. I accept that the capacity crisis identified by Vodafone is a proper estimate.

693On the basis of that BVM, Vodafone has commenced planning to upgrade its network to the extent possible within its capex constraints. It has undertaken modelling using the BVM and calculated that, if it does nothing to redress its congestion issues in the next two years, as many as XXXX XX sites in Vodafone’s network would be congested (ie would experience more than XXX utilisation in the busy hour) by 2021.

694Data growth on its network continues to increase, leading to greater congestion. That congestion is already at levels where customers will be impacted, and the number of congested sites is forecast to continue to grow. The evidence demonstrates that, absent the merger, Vodafone lacks the financial resources to upgrade enough sites fully to redress its capacity problems, other than upgrading sites in XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX.

696Without the merger, Vodafone will have limited ability to increase its network capacity. Mr Wright has given evidence that Vodafone will need to implement demand management strategies ‘within months’. Potential demand management strategies that Mr Wright has described include:

(1)increasing prices;

(2)ceasing to offer unlimited plans; and

(3)throttling data speeds.

697Mr Wright explained in his oral evidence that, based on the growth that Vodafone was seeing, he considered that Vodafone would ‘need to think of ways to repackage plans to reduce that growth to a more acceptable level’. Mr Wright agreed that there would be a number of ways for Vodafone to do this, including increasing its prices, capping data allowances or slowing data speeds at the end of a plan allowance. He agreed that, ultimately, Vodafone had to act to get customers to use less data. Mr Wright stressed that if an MNO has limited network capacity, it would want to manage the rate at which data growth is occurring.

698Mr Wright also agreed that there is a fairly immediate need for Vodafone to manage demand, as part of a portfolio of actions to confront its congestion problems. Mr Wright said that he would anticipate that Vodafone would look at changing plans and look at different product constructs from what they already had put in market ‘so that new customer acquisitions had a different profile of demand on the network’. Mr Wright expected that Vodafone would want to take such steps reasonably quickly (as noted already, ‘within months’), given Vodafone’s delays ‘in doing their modernisation on their network’. Mr Wright emphasised that taking steps to alter terms and conditions for products is a form of demand management that an MNO can do much faster than acquiring spectrum or building new sites.

699Mr Berroeta also stated that Vodafone would need to consider to manage congestion if the merger does not proceed. Additional options canvassed by Mr Berroeta include:

701Adopting any of the demand management options referred to above will adversely affect competition in the retail mobile market.

702I turn then to the issue of network sharing to alleviate Vodafone capacity problems.

703I do not accept that network sharing would be a means by which Vodafone can address congestion and that Vodafone and TPG would have strong incentives to pursue some form of network sharing absent the merger.

704Mr Smith could not provide details as to what the network sharing deals to alleviate Vodafone capacity problems might look like. He could not say, for example, whether they would be MORAN and MOCN arrangements – that was a level of detail he was not familiar with and on which he would defer to technical experts. Mr Smith accepted that he could put the network sharing hypothesis no higher than that it was a theoretically possible course in the counterfactual, but one in respect of which he could offer no detail. Mr Smith could not identify any form of network sharing agreement that would address Vodafone’s network capacity issues or would replicate the advantages that would flow from the merger.

705Mr Wright addressed two types of active network sharing – MORAN arrangements, where two or more MNOs share the active elements in the RAN base stations, but do not share spectrum; andMOCN arrangements, where one or more MNOs share both the active elements in the RAN base stations and spectrum.

706Mr Wright’s evidence was that there was no prospect of Vodafone and TPG agreeing a MORAN arrangement absent the merger. He explained that conclusion this way:

The reason I took that view is that when I looked at the macro network requirements for TPG with the spectrum they own, on the Vodafone and almost any other macro network cell spacing, the low band versus the high band coverage range would impact the ability of the TPG network to carry traffic. So that’s why I made that conclusion. …

[The] [s]pectrum holdings of …TPG does not lend itself to rolling out a macro network on typical site spacings and, again, that largely leads you to …likely why they chose to do a small cell network.

707Mr Wright said that TPG’s spectrum holdings are ill-suited to be rolled out on a conventional macro cell network. Its spectrum holdings are insufficient for that sort of deployment. Mr Wright explained this in his first report:

A key additional detail to note for TPG is that their mid band spectrum holdings are all at 2600 MHz and 3.6 GHz which are located at the higher end of the mid frequency band compared to other MNOs who also hold 1800 MHz, 2100 MHz and 2300 MHz (Optus) spectrum. The shorter range of coverage of the 2600 MHz and 3.6 GHz bands relative to the other mid bands will limit how much traffic can be carried on sites that are spaced more widely for low band coverage. To effectively utilise this spectrum would require a macro network with more sites built closer together which in turn would make such a network more expensive to build than one built using a combination of lower spectrum bands.

708It follows that Mr Wright saw no value in a MORAN between Vodafone and TPG because Vodafone would favour a conventional macro site deployment, whereas TPG’s spectrum holdings would dictate an altogether different network design.

709Mr Wright’s evidence was that a MORAN between Vodafone and either Telstra or Optus was a possibility. He said he was never aware of any discussion of such a possibility within Telstra when he was there, and he said he did not know if a MORAN between Optus and Vodafone would be possible.

710Mr Wright’s evidence was that an MOCN between Vodafone and TPG was possible, but that such agreements required ‘complex business investment and commercial contracts and procedures’. He said that such arrangements ‘take commitment from both sides’ and that such arrangements pose ‘significant technical network integration issues and would be very costly’ (as he wrote in a statement to the ACCC’s Domestic Mobile Roaming Declaration Inquiry in 2016). He accepted that the only MOCN he had been involved in ‘ended pretty badly’. That MOCN between Telstra and Hutchison/3 (‘3’ being a brand of Hutchison) was in respect of a 3G network, whereas any MOCN between Vodafone and TPG would be for 4G and 5G networks that included data traffic. Mr Wright accepted that this added a further level of commercial complication even beyond that dealt with by the unsuccessful MOCN between Telstra and Hutchison/3.

712I should, for completeness, mention the Mobile JVA entered into between Vodafone and TPG on 30 August 2018. Whilst the Mobile JVA will continue in its terms, the evidence was that TPG was not likely to pursue discussions with Vodafone on topics such as spectrum sub-licensing, roaming or network sharing in the absence of the merger. I have accepted this as being the position.

THE FUTURE WITH THE MERGER

The submissions of the ACCC

713The ACCC submitted that Vodafone’s case on MergeCo was opened at a high level of generality, as was the evidence adduced by the merging parties. It was submitted that there was nothing in the evidence that would allow the Court to find that the retail mobile network of MergeCo and its offerings will be anything more than a continuation of Vodafone’s mobile network and market behaviours.

714The ACCC submitted that the evidence which is specific points away from the generalised assertions which Vodafone advances. In particular, the ACCC contended that what the evidence shows is that:

(1)MergeCo does not have plans to spend any more capex on the mobile network than Vodafone is already spending, and in fact it appears expenditure is to be reduced;

(2)MergeCo does not have plans to raise more capital by way of equity within the relevant timeframe;

(3)the public commitment to deleverage, coupled with the public commitment to pay ‘at least’ 50% of NPAT as dividends, puts a practical limit on the likelihood that MergeCo will raise debt (and the extent of any debt that could be raised), particularly where it is a fundamental feature of the merger that the dividend stream be sufficient to service the US$3.5billion debt taken off Vodafone’s balance sheet by its shareholders;

(4)even if it obtains debt finance, there is no evidence it would draw down on a facility to fund network expenditure (and it has incentives not to do so);

(5)the public commitment to pay ‘at least’ 50% of NPAT as dividends limits the cashflow that MergeCo will have to fund investment (and, as noted above in (1), MergeCo does not intend to spend more capex on the mobile network than Vodafone is already spending);

(6)MergeCo will spend less on capex as a proportion of EBITDA than Vodafone presently does, and will still lag far behind Telstra and Optus;

(8)MergeCo does not have plans to spend the capex necessary to make use of TPG’s 2600MHz spectrum;

(9)no analysis has been done to identify the overlap between the location of TPG’s small cells and Vodafone’s congestion hot spots, only a limited number of TPG small cell sites are likely to be usable, and TPG’s small cells cannot be used in a 5G network while they include equipment supplied by Huawei. Consequently, any benefit they offer MergeCo will only be short-term;

(10)MergeCo does not have any plans to expand the mobile network footprint in regional areas and (on Mr Badrinath’s evidence the regional market can only support two MNOs) will likely not do so, at least within the relevant timeframe, meaning that MergeCo will continue to have the same coverage limitations and dependence on Optus roaming which Vodafone claims hampers it at present; and

(11)the opex synergies are high level estimates which may or may not be realised and which do not, in any event, create sufficient cashflow to make much of a difference to network investment in the relevant timeframe.

715It was submitted that whilst it may be accepted that MergeCo having the combined spectrum holdings of the two entities (and, in particular, TPG’s 2 x 10 MHz of 700 MHz) gives MergeCo more spectrum than Vodafone would have alone:

(1)the mere possession of more spectrum does not, in and of itself, establish that MergeCo will behave differently and in a more competitive manner than would Vodafone, absent the merger, particularly where there is no evidence of plans to incur capex to actually deploy TPG’s spectrum in areas requiring further capex (beyond the scope of the RAN Refresh program) on new radios and the like; and

(2)MergeCo’s behaviour in the market would not lead to a more competitive position than would exist if Vodafone maintained its current competitive position in the market and TPG entered as a fourth MNO.

716The ACCC accepted that on paper, MergeCo has greater capacity to raise debt, but submitted that the evidence does not indicate any intention to exercise this capacity in the relevant timeframe so as to improve the state of competition in the retail mobile market. Rather, it indicates an intention to deleverage and reduce capex. Similarly, while it may be accepted that, as a point of principle, ‘more spectrum is better’, Vodafone has not advanced any evidence to establish that MergeCo will use the 700 MHz spectrum XXXX XXXX XX in the relevant timeframe. The evidence, it was submitted, is also that none of the 2600 MHz, 1800 MHz or 3.6 GHz spectrum holdings will be of particular use to MergeCo given its commercial and geographic focus.

717The ACCC submitted that the key document setting out MergeCo’s financial position and capex plans is the ‘Merger Financial Summary’, which Mr Badrinath described as ‘the business plan’. The ACCC submitted that the Court should proceed on the basis that the Merger Financial Summary evidences the present intention of the merger parties for MergeCo’s business in the period to 2023.

718It is appropriate to set out in more detail the submissions of the ACCC, which are as follows.

720While having access to TPG’s fibre backhaul network has been identified as a benefit of the merger, the financial benefit is limited to the extent that removing a cost line from Vodafone (ie paying TPG for access to the backhaul) also removes a revenue line from TPG (ie revenue received from Vodafone for access to the fibre network). The ACCC submitted that this was a mere transfer.

721While MergeCo will have access to TPG’s spectrum holdings, the ACCC submitted that the evidence does not support a conclusion that access to that spectrum will lead to any material increase in competition in the retail mobile market by comparison to Vodafone and TPG on a standalone basis in the future without the merger.

722As to spectrum, in Mr Sixt’s view, ‘the benefit of the joint entity having more spectrum than either of the entities on a standalone basis … speaks for itself. If you have more spectrum, it is almost axiomatic that you need to invest less in building sites’. Mr Sixt accepted, however, that this was a ‘first principles’ view.

XXXX XXXX, MergeCo will have access to 15 MHz of 700 MHz spectrum (TPG’s and Vodafone’s combined holdings). But there is no clear evidence that having access to that spectrum would lead to a different congestion profile to that which would result from standalone Vodafone’s use of the 5 MHz of 700 MHz spectrum (which it would be able to use following the RAN Refresh); or that any better congestion profile would lead to materially different competitive behaviour in the retail mobile market by MergeCo as compared with that which would be expected of Vodafone, absent the merger. Mr Berroeta, in his affidavit, contends that the increase in MergeCo’s network capacity from the combination of spectrum holdings would be around XXX times in the 700 MHz band (and not 3 times, which might otherwise be thought to be the increase from Vodafone’s 5 x 700 MHz to a combined 15 x of 700 MHz). However, it is not clear that this necessarily is of great significance in relation to Vodafone’s immediate congestion position as traffic growth is highest in the higher bands. Low-band traffic growth, such as would use the 700 MHz spectrum, has a CAGR of XXX.

In Mr Wright’s view, gaining access to the holdings of 3.6 GHz spectrum acquired by the Mobile JV would improve the business case for MergeCo to deploy 3.6 GHz AAU on macro sites. But absent such deployment, that spectrum could not be used by MergeCo. And the utility of that spectrum is in any case limited until the penetration of 5G devices increases.

727It was submitted by the ACCC that only the 1800 MHz spectrum, then, could be deployed by MergeCo immediately, as Mr Lopez accepted.

728The ACCC then submitted that in his expert report, Dr Padilla stated his view that ‘MergeCo would be able to better utilise the parties’ existing spectrum holdings across their network sites in a way that generates more capacity than the sum of the parties’ individual capacities’.

729However, it was submitted that:

Dr Padilla’s analysis was not to the point. He compared the future use of the spectrum by MergeCo with the current use of spectrum by Vodafone and TPG. This analysis does not compare the future with and without the merger. In particular, it does not consider the use of spectrum by TPG in the future where it rolls out a mobile network;

730Further, the ACCC submitted that Vodafone’s contentions about its need for more capacity to deal with congestion are based on its inflated congestion analysis. If Vodafone’s projections of CAGR are accepted, it follows that any benefits of the combined spectrum for network performance would be short-lived. If Vodafone is right, the continued growth of data use will mean that, while MergeCo’s spectrum capacity may provide capacity relief in the short-to-medium term, its spectrum would quickly be utilised, leaving it still needing to address the difficulties Vodafone claims it currently faces.

731As to TPG’s small cell sites, the ACCC submitted that the evidence does not demonstrate the extent to which:

those small cell sites might be of practical utility to MergeCo;

MergeCo would incur costs to complete small cell sites (as necessary, given many are not completed);

congestion might be assisted by using those small cells; or

by using the small cells, MergeCo’s competitive offering might be superior to that of Vodafone, absent the merger.

734There is, the ACCC submitted, no basis to support a finding that TPG’s small cells will provide a benefit (or any material benefit) to MergeCo leading to an increase in competition in the retail mobile market. Vodafone contended that the evidence makes clear that Vodafone will deploy TPG’s small cells, immediately. The ACCC submitted that even if there was a basis for such a finding, any benefit would be short-lived, because the small cells are Huawei equipment and therefore cannot be expected to be used alongside another vendor’s equipment and cannot form part of a 5G network. Similarly, Mr Sivagnanam’s suggestion that the TPG small cell sites could be used to maintain continuity of coverage during macro site upgrades as part of the RAN Refresh would be only a limited, short-term benefit.

735As to the regional network, the ACCC pointed out that Vodafone does not plead that MergeCo will expand its regional network, which is presently limited. Its plea is limited to alleging that it will have the spectrum required to ‘offer improved services to customers in significant regional areas’. That appears to be a reference to the major regional centres where Vodafone already has a regional network, and not to regional areas where Vodafone currently relies on roaming on the Optus network. Accordingly, there is no basis in the pleadings for the Court to consider the extension of a regional network as likely to lead to an increase in competition. In any event, even if that matter were to be considered, the evidence does not support a finding that MergeCo would be likely to extend its regional network.

736In the ACCC’s submission, the Court should find that MergeCo will not expand its regional network in the relevant timeframe. Mr Berroeta suggested that MergeCo would be able to ‘explore more presence in the regional market’ and that it would have ‘a higher chance to consider any investment in regional Australia’. But his evidence was that Vodafone does not see regional Australia as an attractive market, partly because it has a small and declining addressable market of only about six million people, and partly because Vodafone’s presence there is limited, ‘so we concentrate where we have more presence’. In the future with the merger, these factors remain just as unattractive for MergeCo.

737The ACCC observed that Mr Badrinath gave evidence that the view he expressed in his affidavit that ‘[i]n large parts of Australia, it is only economic for one or two operators to roll-out network infrastructure, as the population size does not support a higher number of operators’, would ‘to a large extent’ remain the same in the future with the merger. Indeed, Mr Berroeta accepted that a possible regional roll-out was not contemplated, let alone costed, in business plans for MergeCo–XXXX XXXX XXXXX XXXXX XXXXX– and that rolling out a regional network would be a significant investment.

738Vodafone contended that the merger would alleviate Vodafone’s funding difficulties, ‘open[ing] opportunities for better access to external funding’ and giving it ‘the ability and incentive to obtain sufficient funding to undertake the investment that is necessary to maintain an efficient network’. The ACCC contended there was no evidence of any plans to undertake investment beyond that which will be undertaken by Vodafone absent the merger. In fact, capex is to be reduced when compared with the capex that Vodafone will spend on its network, absent the merger; XXXX XXXX XXXXX XXXX XXXX XXXX XXXX XXXX XXXX.

739In response, Vodafone contended that the illustrative financials, being the Merger Financial Summary, was prepared on the basis that it was assumed MergeCo’s capex spend would be quantified as the sum of the roll forward capex of TPG and VHA as standalone entities. It was contended by the ACCC that it follows from that that the illustrative financials show capex that substantially exceeds VHA’s approximate standalone capex envelope of $500 million per year.

740Mr Berroeta also explained in cross-examination that the capex numbers in the illustrative financials are not a capex plan for MergeCo. It was submitted that all that was done was that the two companies’ individual standalone capex plans were added together:

Now, you see the lines for VHA capex and TPG capex?---Yes.

Do you agree that these lines just roll forward the two merging parties’ capex expectations?---Yes. In the absence of a joint plan – the projection is a roll forward of the anticipated capex.

741Further, the ACCC contended that:

there is no plan for MergeCo to raise equity;

MergeCo will maintain dividend payments at the level necessary to service the debt which is being taken off MergeCo’s balance sheet (and which is guaranteed by Vodafone Group and CKHH);

as MergeCo deleverages and so reduces its interest expenses, MergeCo’s NPAT (and hence its ability to pay dividends at the level necessary to service the debt taken off its balance sheet) is supported by the benefit of using Vodafone’s accumulated tax losses;

from 2022, when MergeCo is projected to start paying tax, the dividend payments will be sufficient to service the debt only if – as is the stated intention –MergeCo deleverages, so as to bring down the interest payable; and

in these circumstances, there is a practical ceiling on MergeCo’s ability to take on extra debt in the relevant timeframe.

742The ACCC noted that Vodafone owes debts to banks under a US$3.5 billion syndicated loan facility and an A$1.7 billion loan facility. Those debts are guaranteed by Vodafone Group and CKHH on a 50/50 basis. A crucial part of the merger is that the US$3.5 billion loan will be taken off the balance sheet of MergeCo and novated to a joint venture company, formed, owned and controlled 50:50 by Vodafone Group and CKHH. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XX. This is part of a debt restructure which Mr Sixt explains is ‘necessary to deliver the agreed shareholding split’ and ensure a near even ‘split of ownership and control of MergeCo’.

745In circumstances where MergeCo will be majority owned by the Vodafone shareholders, and where the Vodafone shareholders will nominate four of ten Board seats, with Mr Berroeta also being a director, and where a public commitment to deleveraging and minimum dividend streams has been announced, the ACCC submitted that the Court should be satisfied that MergeCo will not reduce the level of dividends. If anything, based on Mr Badrinath’s evidence, the level of dividends will be increased.

747The above summary sets out the deleveraging profile of MergeCo. That profile is consistent with the public commitment to deleveraging made in the context of the announcement of the merger. The ACCC pointed out that deleveraging was the stated intention when the merger was announced and that XXXX XXXX XXXX XXXXX XXX XXXX XXXX. Mr Sixt’sevidence was that, absent reinvestment opportunities, he expects MergeCo to deleverage and pay down its debt.

751It was submitted that although Vodafone (as the legal entity that would ultimately become MergeCo) entered into a facility of $4.75 billion in December 2018 XXXX XXXX XXXX XXXX::

the bulk of that facility was a refinancing of the debt MergeCo would carry in any event. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX;

although it can be accepted that MergeCo is likely to be able to obtain debt finance if it wants to, there is no evidence that it would actually draw down on a facility to fund network expenditure XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX; and

in fact, given the need to maintain high dividend payments and MergeCo’s intention and public commitment to deleverage, there are incentives for MergeCo not to take on more debt.

752Additionally, it was contended by the ACCC that it is unlikely that MergeCo will raise equity within the first five years after the merger: Mr Sixt is not aware of any proposal for MergeCo to engage in capital raising within this period.

758The ACCC also submitted that the opex synergies are high level estimates which may or may not be realised and which do not, in any event, create sufficient cashflow to make much of a difference to network investment in the relevant timeframe.

759The ACCC submitted that the evidence does not demonstrate that MergeCo would operate a network that would have substantially greater capacity to win market share from Telstra or Optus or offer a competitive constraint substantially greater than that offered by Vodafone and TPG in the future without the merger. Indeed, MergeCo is likely to develop its network in a similar way to standalone Vodafone. Vodafone and TPG have not adduced any evidence that MergeCo will have either the capacity or strategic willingness to make investments in mobile at the level of Telstra or sufficient to compete head-to-head with Telstra or Optus.

760MergeCo’s geographic and population coverage would not be substantially different to that of a standalone Vodafone; like Vodafone, its network will lack regional coverage.

762The ACCC contended that the most likely scenario is that MergeCo will adopt a similar competitive approach to that which Vodafone adopts currently, with an offering in the retail mobile market which is not very different from Vodafone’s current offering. In other words, MergeCo’s mobile business will be Vodafone’s mobile business, with the addition of spectrum from TPG which it will only get the full benefit of by investing in capex.

763MergeCo would be likely to compete in the same metropolitan areas in which Vodafone currently competes, and in the same areas of the market as Vodafone does now, seeking to protect revenue from Vodafone’s existing customer base while minimising capital expenditure. Moreover, as Mr Smith stated, given that TPG’s and Vodafone’s customer bases would likely overlap significantly in the future without the merger, MergeCo would have less of an incentive to introduce aggressively priced plans and offers (as compared to TPG, as a new entrant, and Vodafone, responding to competition from TPG, in the future without the merger), as this would be likely to cannibalise a significant proportion of Vodafone’s subscribers.

764The ACCC contended that the merger will not increase scale in the retail mobile market.

767Ultimately, the ACCC submitted that the evidence does not support the conclusion that MergeCo will have more success cross-selling than Vodafone and TPG standalone in the future without the merger. In his expert report, Mr Smith observed that it is unclear how cross-selling and bundling by MergeCo would benefit competition, and notes that there is a lack of evidence about the importance of bundling to consumers.

768Turning to the larger corporate and government customers, Vodafone contended that MergeCo ‘will be particularly well-placed to challenge in the least competitive segment of the retail mobile market, which is supply to government and large commercial enterprises’. However, it was contended by the ACCC that there was little evidence about:

(1)the process of integration that would be necessary;

(2)the size of the supposed opportunity that would be available to MergeCo;

(3)the likelihood of MergeCo actually succeeding in a segment where Optus is a ‘distant second’ to Telstra, despite it having a regional network, fully converged services, and the ability to offer a sophistication of product and services which, in the opinion of MrBerroeta, large customers want.

769Further, it was submitted that to the extent Vodafone’s ability to compete in winning business from mid to large corporate customers and government is said by Vodafone (drawing on MrBerroeta’s speculation) to relate to Vodafone’s reputation and lack of regional coverage, those two matters will remain unchanged in the merger scenario. Dr Padilla’s evidence in conclave was that three things are needed to compete for government and corporate business: bundling, quality and coverage. It was submitted that the merger will only help with one of those: the ability to offer bundled services. It will not assist with the other two. For this reason as well, Dr Padilla’s opinion that MergeCo will be a stronger competitor in the government and larger corporate sector should not be accepted. So far as reputation is concerned, it was submitted that it cannot be supposed that large customers are so naïve that any reputational issues associated with the Vodafone network can be overcome simply by offering the mobile services under another brand name forming part of the MergeCo stable.

770The ACCC contended that at most, the evidence demonstrated that MergeCo might have a greater capacity to offer sophisticated bundled products to those large corporations and governments to whom whole of business solutions and sophisticated fixed services are essential. Even then, though, Mr Davies’ evidence was that in the last six or seven years there has been a trend away from bundling in the enterprise sector, and a ‘propensity to, perhaps, consume mobility from a different provider to the data network’. Further, the ability of Optus to provide sophisticated bundled products does not appear to have enabled it to more effectively compete for large corporations, meaning that the Court should not conclude MergeCo would succeed where Optus has failed.

771The ACCC submitted that, ultimately, the competitive constraint of MergeCo on the retail mobile market is not likely to be greater, or materially greater, than that provided by Vodafone and TPG absent the merger. In this regard, as Mr Smith explained, the ACCC submitted that the merger parties have failed to demonstrate that any of the claimed efficiencies or benefits of the merger will likely have the effect of increasing competition in the retail mobile market, particularly by comparison to the state of competition in the future without the merger.

772The ACCC pointed to the evidence of Mr Smith, which addressed each of the claimed efficiencies in his report. Mr Smith’s evidence was that many of these benefits are not merger-specific, and that to the extent these benefits are substantial, Vodafone and TPG will have strong incentives to achieve them in the absence of the merger (through network sharing for example). Mr Smith considered that ‘the benefits from network sharing can be substantial outside the scope of a merger’, and noted that such network sharing arrangements have been used both in Australia and extensively outside Australia. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX.

The submissions of the merger parties

773The answer to the ACCC’s submissions by the merger parties at a general level was as follows, which submissions of the merger parties I have accepted.

774The merger will promote competition in the retail mobile market. It will bringtogether the complementary businesses and assets of Vodafone and TPG to create anASX-listed investment-grade fixed and mobile telecommunications company. MergeCo will benefit from significant enhancements in its network capacityand quality. It will be able to deliver a superior product offering to all customersegments.

775It was submitted that MergeCo’s improved financial position will enable it to invest moreheavily in its network infrastructure, assisting to alleviate the congestion issuesthat Vodafone currently faces. MergeCo will also be able to deploy a 5Gnetwork faster than Vodafone would be capable of doing on a standalone basis. As aresult, MergeCo will be able to meet the demands of customers as the nexttechnological generation change takes place, and will position it to be a far moreeffective competitor to Telstra and Optus.

776Then it was submitted that MergeCo will have improved assets and capabilities that areimportant to win contracts from enterprise and government customers. Vodafone hassought to compete in that segment for a number of years with limited success. Theability to more effectively bundle fixed and mobile products (to create ‘whole ofbusiness’ solutions), combined with access to TPG’s fibre assets, will allow MergeCo to deliver a superior product to enterprise and governmentcustomers that is capable of challenging Telstra’s dominance in this segment.

777The increasing desire of customers across all segments for bundled solutions willalso generate an opportunity for MergeCo to increase its customer basethrough cross-selling mobile products to MergeCo’s fixed customers, andvice versa, which in turn will drive the ability for MergeCo to attain thescale required to operate as a competitive force.

Consideration of competing positions

778I turn now to consider the competing submissions of the parties. It is convenient to start with a view of the anticipated competitive effects of the merger from a competitor. While not decisive, the formulated and timely views of a competitor properly understood in the context they were made are significant in the Court’s understanding of the competition framework in a market.

781Of course, it does not need to be shown that MergeCo will enhance competition: the question is whether the merger would have the effect, or be likely to have the effect, of substantially lessening competition in the retail mobile market.

782I turn to various aspects of the significant arguments put by the parties.

783I make some preliminary findings on two important contentions of the ACCC before dealing with other specific topics.

784First, as to the policy of paying a dividend of at least XXX of net profit after tax, the ACCC put to a number of Vodafone’s witnesses that MergeCo would use its net profit after tax to pay dividends to its shareholders or to pay down debt. The ACCC contended that MergeCo would not use its financial firepower to invest in its network or compete for market share. I do not accept this contention.

785Mr Sixt explained the benefits to a public company of a healthy dividend stream:

[I]t’s also in the interests of the new TPG … to have a solid dividend policy. That is what shareholders in public companies expect and it’s one of the things that they look to. So there was really no inconsistency between the objective of achieving dividend flows that would at least cover the interest and perhaps repay some of the debt and supporting the … value proposition of … MergeCo’s shares … as public company shares.

786It will ultimately be a matter for the Board of MergeCo to determine how to apply its free cash flow. Mr Berroeta gave unchallenged evidence as to the steps that he, as the future CEO, would consider, and with an improved balance sheet the options available to MergeCo include:

787The availability of net profit after tax to pay dividends or pay down debt simply illustrates that MergeCo is generating sufficient funds to take such steps. There is no evidence that MergeCo would not use its improved financial position to compete more effectively in the retail mobile market.

788The modelling conducted at the time of the merger negotiations assumed a 50% dividend payout ratio by MergeCo to its shareholders. That payout ratio is considerably lower than the dividend payout ratios adopted by Telstra and Optus:

(1)Telstra’s dividend policy is to pay a fully franked dividend of between 70% to 90% of underlying earnings.

(2)Singtel (Optus’ listed parent company) had an ordinary dividend payout for the financial year ended 31 March 2019 which was 101% of the Group’s underlying net profit and 88% of the Group’s free cash flow.

789In the Australian market, some investors place great weight on dividends and some companies attract investors by paying attractive dividends. Accordingly, being able to pay an attractive dividend will be important for MergeCo’s ability to attract equity capital.

790Secondly, Vodafone highlighted the XXX XXXX five year revolving facility that will be available to be drawn for MergeCo’s future funding needs and submitted that the ACCC had not otherwise demonstrated that MergeCo would have a need to raise capital by way of equity in order to be competitive. Mr Sixt’s evidence was that equity would only be required in circumstances where there had been a ‘catastrophic failure’. While Vodafone faces serious obstacles because it is capex constrained, it does not follow that MergeCo will be as dependent on raising further capital as Vodafone. That is because the merger affords considerable benefits at relatively small incremental cost. For example, Mr Sivagnanam gave evidence that adding radios to Vodafone’s sites to accommodate TPG’s spectrum adds only a small incremental cost, so the spectrum gain from the merger can be leveraged without substantially more capital than is required for the RAN Refresh.

791These matters are important, because they demonstrate the future financial capabilities of MergeCo to carry out improvements to the network. I now turn to specific issues.

Network capacity and quality

792I have accepted that Vodafone and TPG have lower spectrum holdings relative to Telstra and Optus. This means they each have less ability to offer products with large data inclusions and high data speeds to the marketplace. In Vodafone’s case, it is also suffering from congestion issues, the extent to which has been contested by the ACCC.

793The acquisition combines the spectrum holdings of Vodafone and TPG in the one company, which could be deployed to increase network capacity. This would relieve congestion on Vodafone’s existing network and improve the overall customer experience, and would enable MergeCo to make aggressive data offers in the marketplace that are attractive to many customers. The spectrum held by TPG and Vodafone is in some respects complementary and this would be a benefit of the merger.

794In this regard, Mr Sixt gave evidence (which I accept) that the benefit of having more spectrum speaks for itself (even if at first principles level), because it ‘maximises the optionality that you have in terms of how you achieve coverage, density and capacity necessary to serve your customers’. Likewise, Mr Teoh’s evidence was that MergeCo’s complementary spectrum holdings would make it a more effective competitor.

795In my view, the evidence establishes, as contended by TPG, that MergeCo could combine its spectrum to realise these benefits in five ways.

796First, because TPG’s 2 x 10 MHz and Vodafone’s 2 x 5 MHz of 700 MHz spectrum are in adjacent bands, this spectrum can be deployed as a consolidated band which reduces the amount of bandwidth that otherwise would be consumed for ‘overhead’ control functions if the bands were deployed separately. To make use of the combined 700 MHz spectrum on Vodafone’s macro sites, it would be necessary to install 700 MHz radio equipment, because as of June 2019, only XXXXX Vodafone base stations had 700 MHz radio equipment installed. However, if the acquisition proceeds, there would at least be a stronger business case for deploying 700 MHz radio equipment as part of Vodafone’s RAN Refresh program, because it would provide significant capacity relief.

797XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXX XXX. Vodafone understands the benefit of deploying TPG’s 10 MHz of 700 MHz spectrum as part of a combined lot of 15 MHz. I do not see this benefit as being discounted in the future by Vodafone.

801Then there is the debate between the parties on the congestion faced by Vodafone. Whatever is the state of the congestion issues now, I accept that Vodafone will face congestion issues that will cause its network quality to deteriorate unless steps are taken to address those issues in the near future.

802Vodafone’s congestion issues have arisen primarily because the demand for mobile data has grown exponentially in recent years. Data growth on Vodafone’s network was XXX in 2018 and XXX in the 12 months from June 2018 to June 2019.

803In the light of that data growth, Vodafone has modelled its RAN Refresh network planning based on a CAGR of XXX (with a CAGR of XXX being a lower case scenario). The relevant Vodafone personnel, who are experts in analysing network demand, consider that this is the appropriate forecast growth rate for the purposes of driving Vodafone’s business decisions. MrBerroeta, who initially considered that the data growth rate may taper off, has since come to the view that a XXX data CAGR is appropriate in the light of Vodafone’s actual network experience. I accept this evidence.

804It was suggested by the ACCC to Mr Sivagnanam that the data CAGR adopted by Vodafone in its network planning calculations was too high and Vodafone should instead have used a CAGR of around XXX. I have accepted the data growth rate that Vodafone uses in the ordinary course of its business for the purposes of network planning (and which is based on actual customer demand). I should interpolate that I understood that there is a significance of a change in the CAGR: for instance, a difference of XXX between XXX and XXX would halve Vodafone’s modelled congestion. However, this is all a matter of business judgement, using appropriate tools and assumptions to determine future action.

805There was considerable debate about the Nokia Wireless Traffic Report (‘Nokia Report’) and Vodafone’s CAGR figures and the RAN Refresh modelling. Whilst I do not consider it is a material matter in the overall context of the issue of congestion, it seems to me that based on a 10 year period, the CAGR represented by the Nokia Report was between 33% and 47%.

806As to Vodafone’s CAGR figures, whilst the lower and upper may be in dispute, the real issue is whether these figures are in any event appropriate to use in projecting future congestion on Vodafone’s network.

807I am satisfied based upon the evidence of Mr Sivagnanam and Mr Lopez that their projection ofgrowth in the future, whilst not a perfect prediction, is not unreliable or extreme. In any event, changes in the CAGR would not affect the problem Vodafone faces.

809Vodafone has formed its data volume growth projections in the ordinary course of its business. It was planning to make substantial investments based on those projections as part of the RAN Refresh. In my view, it should be accepted that the forecasts prepared by Vodafone represent abona fide, reasonable and realistic projections of how data volume and congestion will grow on its network in the future.

810The congestion levels to be expected by Vodafone were illustrated by the modelling exercise undertaken by Mr Lopez over the course of May to July 2019. Despite the submissions of the ACCC, I see no reason not to accept this analysis as a bona fide attempt to predict the future.

812Mr Wright also assessed the current and future degree of congestion on Vodafone’s mobile network. His evidence was that Vodafone’s network is likely to become increasingly congested, and that Vodafone would need to take steps to increase its network capacity. In his first report, Mr Wright concluded that:

In the absence of a managed approach to demand growth such [as] using customer plan limits and rate limiting combined with the corresponding availability of network investment and spectrum, the VHA network may reach increasing levels of network congestion requiring additional cell densification and/or acquisition of additional spectrum.

813Mr Wright described the pressure that increased data growth places on capacity constrained MNOs such as Vodafone as follows:

[I]f you have limited network capacity, you want to manage the rate at which data growth is occurring because it isn’t an unlimited resource. Even Mr Björnson refers to Cooper’s law which, I think, doubles every two and a half years which is, you know, far less than those types of numbers I saw that Vodafone were growing at, but then you also have this continual process with networks where you invest in additional sites to grow more capacity because demand does go up and it’s not going to stop. So you’re looking at next generation technologies, modernisation of technology, acquisition of more spectrum, building more densification in the network and when these are in balance, the business continues smoothly.

814Mr Wright accepted that consumer demand for data is rapidly increasing, and this required a cycle of investment in technology, sites and spectrum.

815There seems no dispute that if Vodafone’s congestion levels worsen, the impact on network quality is expected to be to some degree worse.

816It was submitted by Vodafone that the merger will assist in addressing Vodafone’s network congestion issues in the following ways:

Vodafone and TPG will be able to combine their spectrum assets.

Vodafone will be able to integrate a significant number of TPG’s small cells into its mobile network.

MergeCo’s improved financial position will enable it to fund future spectrum purchases and carry out a RAN upgrade more quickly and comprehensively than Vodafone on a standalone basis.

818TPG holds up to 2 x 10 MHz of 1800 MHz spectrum in Adelaide, Canberra, Darwin, Tasmania and a number of other significant regional areas. MergeCo would be able to deploy TPG’s 1800 MHz spectrum holdings, providing an immediate capacity boost to Vodafone’s network in regional areas including Tasmania, Darwin, Canberra, Adelaide and the Gold Coast.

821The improved financial position of MergeCo will enable it to carry out a RAN upgrade across a greater number of sites and at a faster rate. Again, the extent of such enablement may be an issue, but there is an increased capacity and incentive to so act by MergeCo. Upgrading a higher number of sites per year will allow MergeCo to deploy its 700 MHz and 3.6 GHz spectrum more quickly and thereby relieve congestion. The deployment of that spectrum will also reduce the need to address Vodafone’s immediate capacity limitations by building further sites, which will release additional capex for the 5G roll-out.

822Mr Sivagnanam explained the position as follows, which evidence I accept:

823Therefore, in my view without a merger there would be challenges in congestion issues, which the merger will assist in the management thereof.

824I accept that MergeCo will need to take further steps and invest additional funds after the merger is completed. This has not been detailed in evidence but I would not expect this to occur at this stage of the merger process. However, I find that there will be some financial improvements that follow from the merger, so that it will be able to upgrade sites to 5G faster and fund additional spectrum purchases as and when the government makes spectrum available in the future.

825Then there is TPG’s fibre infrastructure. Having access to such infrastructure will enable MergeCo to deliver a superior product to customers that will enhance its ability to compete with Telstra and Optus. Mr Berroeta gave evidence to that effect during his cross-examination in the following exchange:

And do you believe that if the merger proceeds MergeCo… would have an offering with the same features as can be offered by Telstra and Optus?---The merged company has features that not even Optus or Telstra has, because of the products that TPG had.

826Mr Berroeta described the importance of fibre assets in delivering a competitive mobile network in the following terms:

It is an unsatisfactory strategic position for an MNO not to have its own fibre infrastructure, which is necessary to connect its mobile sites to its data centres. Fibre infrastructure will be especially important in the future, having regard to the increase in new sites, increasing demand for data, including anticipated high levels of consumption by 5G applications, and the need for fast speeds. Fibre has the ability to transmit almost unlimited amounts of data. VHA presently accesses TPG’s fibre network at significant cost.

827Access to TPG’s fibre infrastructure will also allow MergeCo to offer a higher quality fixed broadband service to all customer segments. It will be particularly important in enabling MergeCo to offer differentiated fixed and mobile bundles in the enterprise and government segment that go beyond simply re-packaging NBN fixed broadband products with mobile services.

829MergeCo would have a stronger balance sheet than either TPG or Vodafone separately. This would provide MergeCo with the capacity to invest strongly in its mobile assets, including by raising equity capital if necessary, and to roll-out 5G services and reduce network congestion more quickly.

830At present, Vodafone currently has borrowings of US$3.5 billion and A$1.7 billion, which are approximately seven times its EBITDA. It has only been able to maintain these debt levels because its shareholders have provided guarantees in favour of Vodafone’s lenders. Further, although it has a working capital facility from its shareholders of $1.5 billion, and has used $320 million for short term financing, it can only draw on that facility for approved expenditures in circumstances where the shareholders have said that Vodafone needs to be self-funding.

831Likewise, TPG has limited debt and equity fundraising capacity for new investment in mobile network infrastructure.

832If the acquisition proceeds, Vodafone’s debt could be restructured so that Vodafone’s debt is reduced to A$1.7 billion, with the remainder of its debt hived off to a separate joint venture between Vodafone’s shareholders. The result could be a merged firm with revenue of approximately $6 billion, EBITDA of approximately $1.8 billion, net debt of approximately $4billion (and a leverage ratio of 2.2x), an investment grade credit profile, the ability to establish a new debt facility well in excess of the initial $4.5 billion, and strong free cash flow.

833Mr Berroeta said that MergeCo would be able to obtain external financing if it chose to do so, including via new debt facilities, issuing bonds or an equity capital raising.

835In my view MergeCo will be in a stronger financial position than Vodafone on a standalone basis: this will enhance its ability to fund the network investment required to remain competitive. Mr Sixt gave evidence that:

[O]ne of the objectives of the merger which was to create … a new public company, a new TPG … that would start its life with an investment grade balance sheet and, actually, with a very strong investment grade balance sheet, would start its life with a debt to EBITDA ratio, for example, of somewhere around two times, which is very healthy, which should qualify it for an investment grade rating which would basically mean that it would have very good access to capital and be perceived as being financially strong relative to its peers.

836As Vodafone submitted, I accept that the objective is achieved in three ways:

improved ability to access debt/equity funding;

cost synergies arising out of the merger; and

financial benefits from economies of scale.

Ability to access debt/equity funding

837MergeCo will be better placed to access external debt or equity funding. Its debt levels will be approximately $5 billion less than that currently owed by Vodafone and TPG. The reduction in debt will be achieved by way of Vodafone’s shareholders assuming responsibility (through a 50:50 joint venture company) for Vodafone’s existing bank debt to that value, with Vodafone being released from its obligations. There is no doubt that financial restructure would not take place absent the merger.

838Vodafone and TPG have already sought to secure debt finance facilities for MergeCo totalling of $4.75 billion. MergeCo will be left with debt in the order of XXX EBITDA, which will enable it to borrow funds from external lenders.

839Mr Badrinath gave evidence as to the way in which debt funding could be used to expand MergeCo’s business:

[A]s time unfolds if the company has additional projects that require it to invest more and, hence, alter the numbers, it gives them the ability to have request to bank funding and – or bond issues …

…

[I]f additional debt were raised it would be to improve the performance of the company, right. I mean, it would be debt that would be raised to do investments to build new things … to grow the company.

Cost synergies

840The financial position of MergeCo will be enhanced by the synergies that can be realised from the merger.

843Mr Sixt gave evidence (which I accept) about how the expected synergies and access to debt would assist in overcoming the impact of the Security Guidance in the following terms:

[T]he merged company would have far more what I would describe as financial fire power and it would come from two sources and the ability to access capital markets, particularly debt capital markets but probably even more importantly the aggregate … synergies that it benefits from which would essentially deliver on a combined basis about 4 … to 5 billion Aussie dollars’ worth of efficiencies which would not be achievable on a standalone basis.

Financial benefits from economies of scale

844MergeCo will benefit financially from achieving scale. Scale is important for MNOs, as it enables the fixed costs of providing coverage to be recovered across a larger number of customers. Mr Berroeta described the importance of scale for an MNO:

Due to the high fixed cost expenditures involved in establishing and maintaining a mobile network, scale is a very important factor in determining whether an MNO will be an effective competitor.

…

All other things being equal, the larger the scale of an MNO, the lower its per-unit costs and the more efficiently it will be able to operate.

…

As VHA primarily focuses on being competitive to Telstra and Optus in metropolitan areas, it needs to obtain spectrum holdings similar to Telstra and Optus to service those customers, even though VHA has fewer customers overall. In Australia, the cost of spectrum generally is unaffected by the size of an MNO’s customer base…and is more expensive in metropolitan areas than in regional areas.

848I cannot see any reason to doubt that MergeCo will be in a stronger financial position than Vodafone and TPG operating alone.

849Further, I do not consider that MergeCo would use its net profit after tax to pay dividends to its shareholders or to pay down debt, at the expense of using its financial firepower to invest in its network or compete for market share.

850It must be accepted that it will be a matter for the Board of MergeCo to determine how to apply its free cash flow. Mr Berroeta gave evidence (which I accept) as to the steps that he, as the future CEO, would consider and the options available to MergeCo which would include:

851There is no evidence that MergeCo would not use its improved financial position to compete more effectively in the retail mobile market.

852Then to the extent that it is contended by the ACCC that CKHH and Vodafone Group would prevent MergeCo from accessing equity capital markets in order to avoid their respective shareholdings being diluted, I consider this unlikely.

853Mr Sixt made this observation on that topic:

[Y]ou’re in the territory of an extreme failure … of the business combination … because you’re postulating that there’s … insufficient cash – insufficient earnings … to pay any material dividends … and that funds are required for some purpose … that is so urgent … that an equity raising is required, and debt capital is no longer available. Gosh, you’ve got to go a long way, right, before you draw the conclusion that such an equity capital raise would ever be necessary.

MergeCo will roll-out 5G faster than Vodafone on a standalone basis

854MergeCo’s ability to invest additional capex in its network will enable it to offer high-quality 5G services to customers far sooner than Vodafone or TPG would be able to alone. In doing so, MergeCo will have the opportunity to become a more effective competitive constraint on Telstra and Optus.

855Mr Berroeta’s evidence addressed the importance of offering customers 5G services as soon as 5G handsets are readily available. This may be some time away, but the marketing of 5G services has already commenced and this will have a significant impact on consumers. As MrBerroeta noted, customers with 5G devices will have an expectation that their MNO will be in a position to deliver a 5G service. Mr Berroeta considered that Vodafone will be less competitive in the market if Vodafone is further delayed behind Telstra and Optus in its 5G offering.

856In my view, 5G is important now and is an important driver of competition. This was the evidence of many witnesses, including Messrs Davies, Ward, Bromhead and Haigh.

857Telstra and Optus are already well progressed in their respective 5G roll-outs. Optus indicated it would commence its roll-out by early 2019 with fixed wireless products in key metro areas.

858There is no doubt Vodafone is behind Telstra and Optus in rolling out 5G. However, accepting this was always going to be the case, catching up is important.

859MergeCo will have the financial capacity required to deploy 5G more quickly, providing the capacity uplift required to provide a competitive service. The increase in the capacity of MergeCo’s network will reduce the need to build additional sites or conduct ‘tactical’ 4G upgrades to relieve immediate congestion issues, a substantial proportion of which is inefficient as it would need to be also replaced in the near future. That will release additional capex which can be directed towards accelerating MergeCo’s 5G roll-out. MergeCo’s access to 60 MHz of 3.6 GHz spectrum will also enable it to provide a higher quality 5G service with faster speeds for many more years than Vodafone or TPG could offer alone.

MergeCo will constrain Telstra and Optus

860MergeCo will be better placed to compete strongly in customer segments, including the low end, high end and enterprise/government segments. MergeCo will have the ability and incentive to compete on price, coverage, quality, network investment, fixed and mobile bundled products and integrated ‘whole of business’ solutions, and use its multiple brands to appeal to and target particular segments.

861With the combination of TPG’s and Vodafone’s complementary fixed and mobile capabilities, the ability to offer whole of business solutions, the increased spectrum and faster path to 5G, MergeCo will have more ability and incentive to compete in the government and enterprise segment. Currently, the enterprise and government segment of the retail mobile market is dominated by Telstra.

862MergeCo will help with market presence of a combined Vodafone and TPG. Mr Berroeta gave evidence (which I accept)that Vodafone’s lack of presence in this segment was due to:

The inability of Vodafone to provide a whole of business solution with a fixed and mobile bundled product offering.

863Mr Davies accepted that fixed and mobile bundling is generally important to enterprise customers, and that Vodafone did not have a fixed or ‘full service’ offering that was relevant to such customers. While Mr Davies stated that there is a trend towards enterprise customers seeking unbundled telecommunications services (ie consuming services from different providers), he acknowledged that this was not a ‘wholesale move’ away from bundling.

864In my view, MergeCo will be at least in a stronger position to win government and corporate customers compared with Vodafone’s current position. MergeCo will have access to TPG and Vodafone’s complementary fixed and mobile assets, and with the benefit of TPG’s fibre assets will be able to offer product features that Telstra and Optus do not have. In addition MergeCo will have access to more spectrum in the right bands and contiguous configuration, which will allow it to accommodate higher levels of data traffic. Then TPG will bring to MergeCo significant capabilities in offering integrated ‘whole of business’ solutions, including cloud based technology and hosting services.

865The competition for government and enterprise customers that is enhanced by the merger is not specifically directed towards the retail mobile market as it extends to the fixed broadband market. However, mobile services are an important component of the services provided in the fixed broadband market. Enhanced competition in that segment means that there is enhanced competition in the retail mobile market. The mobile service that MergeCo can supply is more attractive because it is bundled with other services.

866As tobundling and cross-selling opportunities that will become available to MergeCo:

(1)ApproximatelyXXX of TPG’s two million fixed line customers obtain mobile services from a provider other than Vodafone); and

(2)approximately XXX of Vodafone’s six million mobile customers obtain fixed broadband services from Telstra or Optus (rather than TPG).

867Mr Berroeta described the size of the cross-selling opportunity that will be available to MergeCo during his cross-examination in the following terms:

868Mr Berroeta also gave evidence as to the importance of being in a position to provide customers with a bundled product offering as they increasingly demand a ‘household solution’, which incorporates both fixed and mobile services.

869Unlike Telstra and Optus, Vodafone’s ability to offer a mobile and fixed bundle is very limited. Whilst Vodafone commenced providing a retail fixed broadband service in around December 2017, it does not have a well-known brand in this market and lacks any meaningful presence. That is evidenced by the fact that notwithstanding Vodafone’s efforts to penetrate the fixed broadband market, its market share is less than 1%. As Vodafone’s fixed offering is limited to broadband services on the NBN, it is difficult to differentiate that service from competitors and is not a substitute for bespoke services which can be offered on TPG’s owned fibre network.

870TPG, on the other hand, has a strong presence in the fixed telecommunications markets and significant fibre network assets. Mr Berroeta thought that a merger between Vodafone and TPG would be an ‘obvious strategic step’.

871Even if both Vodafone and TPG already have the ability to offer bundled solutions, the merger would change the market perception. The fact is that the market does not perceive Vodafone as having an ability to offer bundled service solutions, and with the combination of Vodafone and TPG it is likely this perception will change.

872MergeCo would impose a meaningfully greater competitive constraint on Telstra and Optus than that which Vodafone would impose without the merger if only for the fact that MergeCowill have the infrastructure to compete and will have the financial capacity to make the investment that is necessary to be a strong competitive force in the retail mobile market.

873Dr Padilla understood that, absent the merger, Vodafone does not have a realistic solution to its capacity problem in the foreseeable future and this can be expected to significantly weaken Vodafone’s ability to effectively constrain Telstra and Optus.

874The ACCC as one of its contentions said that the investment by MergeCo is likely to be similar to that presently planned by Vodafone and not commensurate with that of Telstra or Optus.

875I disagree with these contentions; noting at the outset that the analysis is all about a matter of degree. I have already indicated that I accept that the congestion problems contended for by Vodafone in these proceedings are real and will create a competitive constraint in the future. With the merger, the congestion problems may not be solved, but there will be an improvement. As to the investment plans of Vodafone, I accept that its current plans are in many respects ‘similar’ to those predicted to occur with a merger. However, the implementation of the plans (similar in nature and object) will be more intensive and likely to improve the competitive position of Vodafone (and TPG). I do not consider that the investment will be ‘commensurate’ with that of Telstra or Optus: this is not expected to be the case, nor is it necessary for this to occur to increase competition.

879So much may be accepted. However, this is not to say that there will not be some form of increased competition with a stronger entity in the market to keep Optus and Telstra competitive in price and quality.

880Dr Padilla and Mr Smith addressed this subject of the consequences that will flow in the retail mobile market into the merger, both in their reports and duringthe course of the concurrent oral evidence. This evidence is of benefit to the Court in that it provides an economic framework to assess the evidence otherwise before the Court. However, economic evidence must be viewed in the context of the relevant market and the behaviour of its participants.

881Dr Padilla concluded that the retail mobile market appeared to be currentlycompetitive in both the low end segment and the high end segment,althoughthere was some evidence of Vodafone’s competitiveness in the high end decreasing inmore recent times.The market was not, however, effectively competitive in thecorporate/government sector, with Telstra being ‘very strong’ in this segment.

882Dr Padilla concluded that there was lay evidence which indicated that MergeCo would be a stronger competitor than Vodafone is now. Dr Padilla’s opinion wasinformed by the following matters:

MergeCo would be in a better position to fund investments in itsnetwork, thereby improving network quality.

MergeCo would be able to deliver increased capacity and qualitythrough better utilisation of the combined spectrum and infrastructureassets.The additional capacity created by the merger would be expectedto lead MergeCo to set lower prices than the parties would setindependently. Economic theory shows that firms have an incentive toreduce prices when the cost of supplying additional volumes falls.

MergeCo would be able to roll-out a 5G network faster.

MergeCo would be better able to cross-sell and offer bundled products.

883Dr Padilla drew a contrast between this merger and many others:

Unlike many other mergers, where it is not clear what the merger will bring for consumers, in this case the combination of the spectrum and network assets of TPG and VHA, the combination of the mobile business of one, Vodafone, and the fixed business of TPG, will create –XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX– a more credible third player. This merger is not a 4 to 3. This merger is a 2 plus 1 and plus maybe 1 into three, and credible third player will emerge.

884In his report, Mr Smith did not accept that the merger would necessarily improveMergeCo’s ability to compete relative to the counter-factual. Mr Smithgave three reasons: ‘Merger Specificity’, ‘Pecuniary Benefits’ and ‘Substantiality’.

885Mr Smith’s position was that, while there are benefits that flow from the merger,these may not be merger specific because they might be achieved in thecounterfactual in any event. The key reason given by Mr Smith was that the mergerparties might enter into some form of network sharing arrangement in the absenceof the merger and that that arrangement may give rise to ‘some’ of the samebenefits as the merger.The benefits that Mr Smith considered fell into thiscategory were: the combination of the parties’ spectrum holdings,and thecombination of the parties’ RAN infrastructure.

886Mr Smith’s actual response to the significant merger benefits identified by Dr Padilla was that: ‘[A]t least some of these benefits may be achievable absent the proposed acquisition, in particular through some forms of network sharing arrangements, and accordingly, the relevant portion of these benefits would not be merger-specific’. Mr Smith did not claim any expertise in network sharing arrangements, and it was unclear what sort of network sharing arrangements Mr Smith was referring to. Mr Smith could not be specific in his evidence as to what type of network sharing arrangements he had in mind and how those arrangements would bring about the same efficiencies as the merger.

887To the extent Mr Smith’s merger specificity argument depended on network sharing being a feasible option, in my view, network sharing arrangements are unlikely to proceed in the absence of a merger, and on this topic, Mr Smith’s evidence is of no utility.

888I should add that Mr Foster’s evidence on the issue of network sharing was that ‘because we don’t know the form … we’re having to make assumptions’, and that it is unlikely that the benefits of entering a network sharing arrangement are unlikely to exceed the costs: ‘[y]ou’re talking about a scenario in which VHA, by agreeing to the sharing, enables a fourth MNO competitor into the market, gives it the ladder that brings it into the market’.

889Mr Smith then contended that some of the claimed benefits were purely ‘pecuniarybenefits’ in that they might result in increased revenues for MergeCorelative to the revenue that would be earned by Vodafone and TPG as standaloneentities in the counterfactual.On this basis he concluded that some of thebenefits of the merger ‘may’ not translate into increased competition. The benefitswhich fell into this category werethe benefits from cross-selling,theenhanced ability to invest due to the debt restructuring from the merger,the useof the fibre backhaul and the elimination of capex and opex.

890As to the elimination of capex and opex, Mr Smith’s view was that these arelargely fixed costs and not variable costs and it is only variable costs which have adirect impact on price.MrSmith also considered that increases in profitabilityshould not be taken into account to the extent the increase arises from lesscompetition following the merger.

891Dr Padilla’s evidence was to the contrary, and is in my view more cogent.

892Dr Padilla’s view was that competition is about more than short term priceeffects. A key form of competition between MNOs is through investment thatincreases the quality of their services.Competition in the retail mobile marketis dynamic and involves not only price but non-price dimensions.Mr Smith agreed that the retail mobile market is dynamicand that it isimportant for MNOs to continue investing.

893Some savings can be savings in variable costs, while others are savings in fixedcosts. Both forms of cost savings are important from an economic perspective.Savings in variable costs will be passed on to some degree to consumers in theform of lower prices.Reductions in fixed costs are less likely to be passed on inthe form of lower prices.However, fixed cost savings result in increased cash flows.Investment is sensitive to cash flows and, more specifically, how much a firm caninvest.As Dr Padilla explained, this is because a firm’s cash flow provides a cheaper source of fundingthan having to raise funds externally on the capital marketand empirical studiesshow that firms with better cash flows invest more.

894Dr Padilla also noted that the debt restructure effected by the merger leads tohigher debt capacity and eventually will lead to higher cash flows. In addition,the merger would also provide MergeCo with a stronger balance sheetand capex depth and its public listing and debt-to-equity ratio would give itbetter access to external funds.Dr Padilla explained this as follows:

[With the debt restructure], [y]our debt to EBITDA … ratio is going to befundamentally different. Vodafone has now a crazy multiple and it will go to a multiplewhich is sort of the industry, which means that whenever you need funding, not even internal,but when you need to resort to external funding, you will have cheaper funding.

…

[Y]ou aregoing to have more internal funds, you’re going to have cheaper access to debt markets,because if you have less leverage, then … equity holders will have much more of anincentive to put money... there, because the bankruptcy risk falls significantly.

895This is all consistent with the evidence of market participants.

896Mr Smith concluded in his report that some of the claimed benefits might notsubstantially affect competition in the factual relative to the counterfactual.Mr Smithagreed that the extent of efficiencies was best determined by other witnesses in the proceeding.Mr Smith agreed that he could not say that the ability of Vodafone to compete withTelstra and Optus would not be enhanced with the merger.Mr Smith agreed that other witnesses inthe case were better placed then he was to make this assessment also.

897In the end, the merger parties submitted that the acquisition would substantially increase the competitiveness of MergeCo relative to a standalone Vodafone and TPG for the following four key reasons:

(1)the complementary spectrum holdings of MergeCo would increase MergeCo’s network capacity and ability to compete with Telstra and Optus;

(2)by combining two complementary businesses – namely, Vodafone’s mobile focused business, and TPG’s fixed broadband focused business –MergeCo will have significant cross-selling opportunities, improved ability to offer bundled products that are desired by customers, and an improved product offering for business and enterprise customers;

(3)the ability of MergeCo to fund investment in network capacity will be increased, because MergeCo will benefit from an improved balance sheet (which increases its debt and equity fundraising capacity), cost synergies and the benefits of economies of scale; and

(4)MergeCo would be able to roll-out 5G faster, which lowers the risk of it being competitively disadvantaged as a 5G latecomer relative to Telstra and Optus.

898On the basis of the evidence, I accept each of these submissions, although in each case it is a matter of degree to the extent the competitiveness is increased by each of the four factors. However, I am left in no doubt that a combination of those factors will increase the competitiveness of MergeCo relative to a standalone Vodafone and TPG.

CONCLUSION

899For the above reasons, the Court will make the following declaration and orders:

(1)A declaration, pursuant to section 163A of the Competition and Consumer Act 2010 (Cth) andsection 21 of the Federal Court of Australia Act 1976 (Cth), that the acquisition by the Applicant of all of the ordinary shares in the Second Respondent by means of a scheme of arrangement under Part 5.1 of the Corporations Act 2001 (Cth), and implemented pursuant to the terms of the Scheme Implementation Deed dated 30 August 2018, would not have the effect, and would not be likely to have the effect, of substantially lessening competition in any market in contravention of section 50 of the Competition and Consumer Act 2010 (Cth).

(2)And order that the parties confer, and on or before 12:00 noon on 27 February 2020 provide an agreed minute of order as to costs, or in the absence of agreement, short written submissions as to costs which issue will be determined on the papers.

I certify that the preceding Eight hundred and ninety-nine(899) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.

Associate:

Dated:13 February 2020

ANNEXURE ‘A’

Chronology

1 2009-2015: Relevant industry background

1.1 Vodafone Hutchison Australia early background

1Vodafone was formed on 10 June 2009 through the merger of Vodafone Australia Limited and Hutchison 3G Australia Pty Ltd, following ACCC informal clearance on 29 May 2009.

2In December 2010, the ‘Vodafail’ network issues started to affect Vodafone's performance. Vodafone ultimately lost around 2 million customers (approximately a third of its customer base) during ‘Vodafail’, mostly to Telstra.

3After his appointment as CEO in March 2014, Mr Berroeta's immediate priority was to ‘overcome network quality issues, rebuild the VHA brand, seek to recover lost customers and move VHA towards profitability’. Since ‘Vodafail’, Vodafone has invested substantial capital to improve its network, and introduced initiatives to improve its service, including:

b)TPG acquired AAPT for $450 million on 28 February 2014, delivering TPG’s inter-capital fibre optic infrastructure and diversified revenue from corporate, government and wholesale customers.

c)In September 2015, TPGacquired iiNet for $1.4 billion, which provided a large retail customer base and a leading consumer brand. TPG’s 2016 Annual Report shows that in January 2016, of TPG's total 473,000 mobile subscribers at the time, 176,000 were iiNet subscribers.

1.3 Optus acquires Vivid Wireless

5Optus acquired Vivid Wireless for $230 million in 2012, gaining the licences to substantial mid-band spectrum holdings: 98MHz of 2.3 GHz and 100MHz of 3.5GHz spectrum. These licences were acquired at significantly lower prices than those that were paid in the most recent spectrum auctions.

1.4 Telstra and Optus benefit from NBN Co agreements

6Telstra and Optus receive ongoing payments from NBNCo to facilitate customer switching to the NBN network:

a)The Optus agreement was signed in June 2011 and Optusestimates its value to be‘approximately A$800 million on a post-tax net present value basis’.

b)Telstra’s agreement was signed in 2011 and revised on 14 December 2014, and was valued by Telstra as being worth approximately $11 billion post-tax net present value.

1.5 2013 Spectrum Auction

7ACMA conducted an auction for the sale of 30MHz of 700MHz spectrum in April/May 2013. Telstra secured 2 x 20MHz of 700MHz spectrum and 2 x 40MHz of 2.5 GHz spectrum for approximately $1.3 billion and Optus secured 2 x 10MHz of 700MHz spectrum and 2 x 20MHz of 2.5 GHz spectrum for approximately $650 million. Vodafone did not participate in the auction because it did not have sufficient funding to buy the spectrum at the time, given the high reserve price and single upfront payment.

1.6 Early consideration of Vodafone/TPG merger and February 2015 meeting

9While preparing for an interview to become CEO of Vodafone in December 2013, MrBerroeta first considered the possibility of a Vodafone/TPG merger. Mr Berroeta was appointed CEO of Vodafone in March 2014.

14On 30 September 2015, Vodafone and TPG jointly announced the migration of part of TPG's MVNO customer base to Vodafone’s network, and ‘Project Rainbow’ – TPG's provision of ‘dark fibre’ services to XXXX Vodafone sites, involving TPG's construction of 4,000km of new fibre infrastructure.

2 2016-April 2017: Lead-up to TPG purchase of 700MHz spectrum

2.1 2017 Spectrum auction

15On 29 January 2016, TPG’s Board noted that: ‘Long-term we have to be in the mobile space – the future is mobile. The initial investment may feel expensive now but it is the right thing to do for the long-term benefit of the Company’.

16Around April 2016, TPG approached the Commonwealth Government to acquire the remaining 2 x 15MHz of 700MHz spectrum that was not sold in the 2013 auction, and made an offer in August 2016. The Commonwealth Government rejected these offers.

17On 29 July 2016, TPG’s Board noted that: ‘The industry is changing dramatically. The Consumer business outlook is very tough because of NBN margins… VHA has submitted a request to the government to purchase 2*10MHz of the remaining 2*15MHz spectrum… Although this, together with the equipment and towers would be a heavy investment, it is very strategically important for our Group’s future’.

18In August 2016, Mr Teoh wrote to the Assistant Secretary of the Spectrum Branch at the Department of Communications and Arts, offering to license that spectrum for approximately $857 million.

19On 26 August 2016, TPG’s Board noted that: ‘DSL to NBN migration will create pressure for the Group so we need to look beyond the NBN for growth. In the long-term, mobile will become very important. 5G will be in operation by 2020 and will be capable of threatening fixed business. It is vital therefore that we focus on investing in mobile infrastructure. It will be a massive task and has investment risk but it would be a worse strategy to do nothing’.

20In October 2016, ACMA announced it would auction the 700MHz spectrum in April 2017.